Capital Budgeting In Practice: Issues Not Addressed In Finance Texts

Abstract

Undergraduate and graduate finance textbooks present the capital budgeting process as a formal quantitative process. Absent from this model is any meaningful discussion of the role of qualitative factors in long-term investment analysis. Our findings reveal that for most firms, the conventional textbook approach to capital budgeting is not practiced in the business world. We find that qualitative factors play a critical, and in many cases, a dominant role in the capital budgeting process. The purpose of this paper is to help instructors provide guidance for students in understanding the way quantitative and qualitative capital budgeting tools are actually used in practice. This knowledge will help students use these skills much more effectively and allow them to successfully integrate themselves into a company’s capital budgeting process. Furthermore, this understanding will help the student bridge the gap between education and practice.