Organizing of Capital Budgeting Process and Financial Theory

Muhammad Arslan, Rashid Zaman


The purpose of this study is to find the capital budgeting process which are used by large firms and grasp the reality by getting the information from efficient organizations. Capital budgeting is known as investment appraisal. There are required big amount of funds for capital budgeting (Holmes, 1998). Once an investment proposal starts there incurs a big cost on it and it is not possible to ignore this cost and the reversal of project is also difficult (Holmes, 1998). Opportunities of investment that can produce or give benefit for more than one year are called capital investments (Peterson & Fabozzi, 2002)

On the basis of normative contingency theory a model is structured and the aim for this model structuring is to reconcile the results of some capital budgeting behavioral organizational studies with financial theory. For reflecting the contingent model basic steps, this paper has four sections. In first section paper describe about the capital budgeting process, in second there are definitions of endogenous variables, i.e. variables that defines configuration of process and those variables are internal structural variables; in third section about the exogenous variables or contingent variables and these are external variables that influence the capital budgeting process; in the last examine how capital budgeting process should be formatted and structured and give values to external variables i.e. relationships between the internal with external parameters. In this paper take the organizations and what are the capital budgeting processes that are used in these organizations?

Keywords: Capital Budgeting, Contingency Theory, Strategic Planning Process

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