The Effects of Business Strategy on Economic Evaluation Techniques of Capital Investment

This paper explains firms’ adoption of economic evaluation techniques according to differences in their business strategy and their business environment using mail survey data. Many recent studies focus only on the discount cash flow (DCF) methods, while our research examines the factors determining the use of non-DCF methods as well as DCF methods, and shows the rationality of their use. We discover that the use of non-DCF methods, such as payback method and accounting rate of return, is rational when the use of DCF methods is not valid. We find that business environment characteristics, such as (1) the complexity of the environment, (2) uncertainty, and (3) automation of the production line, affect the choice of the evaluation technique. Furthermore, we find that whether a firm’s strategic type is an analyzer or not affects the adoption of the economic evaluation technique