Date of Defense

12-7-2023

Date of Graduation

4-2024

Department

Finance and Commercial Law

First Advisor

Onur Arugaslan

Second Advisor

Wenling Lu

Third Advisor

Sime Curkovic

Abstract

Capital budgeting is essential for the long-term success of a business. A firm must make the correct decisions when investing capital in projects. If firms do not make the correct decision, it will lead to investing in projects that do not add value to the firm, and it may also decrease the firm’s value. Multiple capital budgeting techniques exist to varying degrees of use. These techniques include Accounting Rate of Return, Internal Rate of Return, Modified Rate of Return, Payback Period, Discounted Payback Period, and Net Present Value. There is widespread research that spans decades of literature on which capital budgeting technique is most valuable. Papers argue for and against different techniques. This thesis contains a review of the existing literature on capital budgeting, including the most seminal papers, Net Present Value, and Payback Period. Academics have preferred Net Present Value over other techniques, especially ones that do not discount the cash flows like Payback Period. This thesis defends the use of the discounted cash flow technique Net Present Value against a non-time value of money technique Payback Period. Net Present Value when applied correctly will always yield the correct decision. In contrast, even when applied correctly Payback Period may not provide the correct decision for a project. This will be shown through multiple scenarios with different cash flows and discount rates. In addition to the analysis, data was collected and analyzed. This data includes the techniques used by a power management company and a global medical technology company. The former uses Net Present Value and Payback Period in their capital budgeting decisions while the latter uses Net Present Value and Payback Period in their acquisition analyses. Interviews with employees from both firms were conducted about their uses of Net Present Value and Payback Period and how they relate to their firm’s capital budgeting techniques.

Access Setting

Honors Thesis-Open Access

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