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Capital budgeting is one of the most important factors in the process of corporate decision-making. Data from numerous previous studies show that managers prefer the simple payback period method (non-discounted payback model) over the net present value method (discounted cash flow model), which academics consider as superior. In particular, almost all investigative research in Japan has shown that the managers of Japanese firms tend to prefer a non-discounted cash flow model, such as a simple payback period method. This interesting gap between business practice and academic theory has long been a puzzle to the academic community. From October, 2008, to January, 2009, I conducted a survey in the form of a questionnaire sent to 225 people in charge of capital budgeting at firms listed on the Tokyo Stock Exchange, with a focus on capital budgeting practices. This paper presents the results of the questionnaire survey and evaluates the capital budgeting practices in Japanese firms. The results show that Japanese firms manage their decision-making by a combination of payback period method and net present value method. While most financial managers utilize multiple tools in the capital budgeting process, these results reflect a better alignment of views between academia and business. |
