Article1997

CAPITAL BUDGETING TECHNIQUES USED BY SMALL BUSINESS FIRMS IN THE 1990S

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Capital Investment and Risk Analysis Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

In recent times, small business firms have created 80 percent of the new jobs in the United States. Thus, their methodology for capital investment decisions is very important, though it continues to be somewhat different from that used by larger business firms. A questionnaire survey with 232 small business respondents indicates that the payback method is still the preferred approach by 42.7 percent of the firms. Unlike many larger firms, their time horizon is often the period over which a financial institution will extend them funding. In any event, the “average” minimal payback period in the survey averaged 2.81 years, a time period far shorter than the useful life of the asset and one that would indicate a required return far higher than most firms anticipate. Somewhat encouraging was the increased use of discounted cash flow methods (27.6 percent), which is a higher rate of utilization than that indicated in other surveys of smaller firms over the last few decades.

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References

1982Principles of corporate finance 1970SURVEY OF CAPITAL BUDGETING: THEORY AND PRACTICE 1977A Survey of Capital Budgeting Techniques Used by Major U.S. Firms 1978SURVEY AND ANALYSIS OF CAPITAL BUDGETING METHODS 1980Management accounting 1972Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques 1975The Capital Expenditure Decision-Making Process of Large Corporations 1984A SURVEY OF MULTINATIONAL CAPITAL BUDGETING

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