EVALUATION OF CAPITAL BUDGETING PORTFOLIO MODELS USING SIMULATED DATA

The effectiveness of six approaches to capital budgeting under uncertainty is evaluated. The standard of comparison was a second-degree stochastic dominance model. The research environment consisted of ten hypothetical capital budgeting projects and an existing asset base. Variations in project demand, competitive actions, and technological changes were simulated by changing the shapes of the cash flow distributions. The required net present value distributions were obtained through a simulation and state of the economy methodology. Results of the study indicated that the models were sensitive to the characteristics of the cash flow distributions and that financial managers must exercise considerable care in their selection of a capital budgeting decision model. The mean-semivariance model yielded the most consistent results while decisions based upon the traditional net present value model were incorrect much of the time.

  • Corporate Authors:

    University of Texas, Dallas

    P.O. Box 688
    Richardson, TX  United States  75080
  • Authors:
    • Bey, R P
    • Porter, R B
  • Publication Date: 1977

Media Info

Subject/Index Terms

Filing Info

  • Accession Number: 00174394
  • Record Type: Publication
  • Source Agency: Engineering Index
  • Files: TRIS
  • Created Date: May 18 1978 12:00AM