Capital Budgeting Techniques for Managers

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Table of Contents

Article Summary and Critique
Weaknesses
Recommendation for Management
Reference

Article Summary and Critique

Michelon et al. (2020) try to find research opportunities associated with capital budgeting. The authors’ main aim is to identify and draft solutions engineering managers face that interfere with and make their capital budgeting process difficult. Their preferred methodology is the development process-constructivist procedure, where the past scientific literature is used to identify and fill the gaps. This article finds that capital budgeting is macro research in which researchers are not likely to research in the same area. In the end, the authors conclude that managers should always use sophisticated analysis methods to avoid capital budgeting mistakes, which could lead to large losses. Below is an article review by Michelon et al., which looks at literature concerning capital budgeting and uses the knowledge in the review to make recommendations in the case study titled “I wish I had a crystal ball.”

The article starts by defining capital budgeting and its importance to different institutions. Michelon et al. say that managers should use sophisticated capital budgeting techniques such as discounted cash flow, net present value, and internal rate of return and simple ones such as accounting rate of return and payback period when making decisions. The study suggests that managers who have used capital budgeting techniques have enjoyed more success than their counterparts who have been ignorant. It has also been found that there is a gap between the knowledge available theoretically and what is practiced.

After the introduction, the study explains in depth what capital budgeting is and clarifies its importance to managers. The research then focuses on identifying the most frequently used capital budgeting techniques and why managers prefer to use some methods over others. The empirical research used in the article showed conflicting results, with some suggesting that payback was the most popular capital budgeting technique. In contrast, others stated that the most popular method was the discounted cash flow. Pro know-c, a methodology where a research engine was used to find the conclusions of most previous literature, was used. The authors identify a problem: most managers do not apply appropriate capital budgeting knowledge when making decisions. Literature from many sources shows that most managers are unfamiliar with many capital budgeting techniques. Capital budgeting success has also been found to be influenced by cognitive ability, preferences, and the level of training possessed by the manager.

According to the study, capital budgeting is not always limited to one type of field and thus should always be tailored to fit the nature of the organization in which the tools are employed. It has also been concluded that researchers with different skill sets should perform different roles. Experienced professionals will use discounted payment methods as some of these skills are gained with time. It has also been found in cases where incentives are given, the success of the investment projects is higher. Success in budgeting is also influenced by other factors such as education, age, and gender.

Machelon et al. (2020) conclude that payback is not a preferable measure of value for projected incomes since it ignores the time value for money principle. The method is, however, widely used because it is easy to compute (Machelo et al., 2020). The study found that sophisticated managers use algorithms, sensitivity analysis, and linear programming to help make inherence and uncertain future decisions. However, despite these advanced techniques being very accurate, the results could be affected if an important variable is ignored. For this issue to be solved, the article recommends adequate training for those involved in financial forecasting.

Weaknesses

The fact that the article mainly focused on the review of literature by previous authors means that biased conclusions are likely to be achieved. The article’s thesis was too broad, and it would be impossible for a conclusion to be reached based on all previous literature on capital budgeting. The definition of keywords was also not well done, making the article hard for an average reader to understand. The research design used in the study was also not well stated, and the research procedure was unclear.

Recommendation for Management

Based on the knowledge gained from the article, there are several recommendations that Richard could give to the management in the case study. First, it would be for him to calculate his Net Present Value (NPV when the organization gets the Food and Drug Administration (FDA) approval. The management could also be asked to keep records of two projections, one with an FDA approval and the other without. It would also be imperative for the management to offer adequate education to managers and other decision makers on capital budgeting and how they should employ discounted budgeting. Richard should have projections for both the best case, the worst case, and the most likely one. The management should also focus on marketing and always ensure that it maintains its market share while also ensuring that the marketing costs don’t exceed the projected evidence.

Reference

Michelon, P. D. S., Lunkes, R. J., & Bornia, A. C. (2020). Capital budgeting: A systematic review of the literature.Production, 30. Web.

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Capital Budgeting Techniques for Managers

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