I. Review of Prior Capital Budgeting Studies
Over the past four decades, financial research has recorded how business use
capital management methods and how large corporations determine the cost of capital
used in capital budgeting decisions. Financial managers and academics have not been in
full agreement as to the choice of the best capital budgeting method. In Exhibit 1, Miller
(1960), Schall, Sundam, and Geijsbeek (1978), and Pike (1996) report payback technique
as the most preferred method, while Istvan (1961) reports a preference for accounting
rate of return. Early studies generally report discounted cash flow models to be the least