Purpose: Large forms use discounted cash flow methods. This research article is aimed at explaining the differences between theory and practice in the implementation of discounted cash flow (DCF).
Scope: The findings of the research article are applicable to firms that rely on DCF. The firms are classified as large firms and DCF may be involved in their either of small and large projects.
Findings/Inferences: Following inferences have been drawn as a result of the research study:
- The minimum rate of earning in flexible budgeting firms is close to the corporate average cost of capital for all discretionary projects.
- In addition to the findings of previous research that states that half or more large firms impose capital rationing on all projects, the current research also suggest that the practice of capital rationing severely impact projects that are smaller in size.
- Top management and leadership should efficiently involve in the decision making process of smaller projects to improve the capital budgeting by making the information processing process simple.
- In case of smaller projects, large firms use simple DCF analysis techniques and incorporate simple payback.
- The project approval process is different firms incorporate different criteria which is dependent on who makes the decision of approving the project.
- The manner a large firm’s management of the capital budget of its smaller projects provide an idea of the useful use of information and skills at its lower organizational levels.