PART 3: CAPITAL BUDGETING
0% 10% 20% 30% 40% 50% 60% 70% 80%
Percentages of CFOs saying that method is used always or almost alwaysAustralia
Brazil
France
Germany
UK
USA
Australia
Brazil
France
Germany
UK
USA
Australia
Brazil
France
Germany
UK
USA
Australia
Brazil
France
Germany
UK
USAAccounting
rate of returnReal
optionsPaybackNPVIRRCapital budgeting techniques (by country)Australia
Brazil
France
Germany
UK
USASources: John R. Graham and Campbell R. Harvey, ‘The Theory and Practice of Corporate Finance: Evidence from the Field’, Journal of Financial Economics 60
(2001), pp. 187–243; Dirk Brounen, Abe de Jong and Kees Koedijk, ‘Corporate Finance in Europe: Confronting Theory with Practice,’ Financial Management
33 (Winter 2004), pp. 71–101; Les Coleman, Krishnan Maheswaran and Sean Pinder, ‘Narratives in Managers’ Corporate Finance Decisions,’ Working Paper,
University of Melbourne, 2008.12 How are the NPV, IRR and PI approaches related?13 What important flaw do both the IRR and PI share?CONCEPT REVIEW QUESTIONS 9-6
9 -7 CAPITAL BUDGETING IN PRACTICE
We conclude with an investment problem that illustrates many of the issues that we introduced earlier
in this chapter.
The Ana-Lab Corporation conducts chemical analysis of water, soil and industrial wastes as mandated
by the Environmental Protection Agency (EPA). Ana-Lab’s customers include local governmental bodies,
who are responsible for ensuring that local water supplies are safe for drinking, and manufacturing
companies, who must verify that the wastes that they release into water or landfills comply with strict
regulatory standards.
A new regulation recently imposed by the EPA sets limits on the amount of a certain chemical that
can be released in industrial wastewater. In the next few years, Ana-Lab expects many of its customers to
ask for new tests that monitor the presence of this chemical. However, over time Ana-Lab’s clients will