CAPITAL BUDGETING AND INVESTMENT

DECISION

Nia Christina16598

ARTICLE FROM CRP

Title : Capital Budgeting: NPV v. IRR Controversy

Theory used by the article / research: Capital Budgeting, analysis of potential additions to fixed assets, long term decisions; involved large expenditures.

Hypothesis of research: NPV/IRR method is plain mathematics

and does not pretend to be ranking device; it cannot be used as such either.

Mathematics is yes indeed a tool, but economics can only then be the master if the tool is used properly and the result are interpreted correctly.

Variable use in research: investmentMethod of analysis:

Net Present Value (NPV) IRR

The Result:By way of the NPV/IRR method, one can assess the conditional acceptability of one investment proposal solely, and mathematics does not pretend that it states anything meaningful with regard to the order of two (or more) investment

Conclusions:The NPV/IRR method neglects substantialism. The NPV e.q IRR fails in numerous cases in making sound capital budgeting decision. Because in fact that the NPV/IRR method meets only nominalism.

ARTICLE FROM STUDENTS

The reason:Interested, because in China and Russia the strength of relationship can affect strongly in making investment decision.

Title: Network triads: transitivity. Referral and venture capital decisions in China and Russia

Theory used by the article / research: Granovetter 1973, Social network theory postulates that personal networks actors tend to be transitive: one friends’ friends are likely to become one’s friend as well.

Hypothesis of research:1. The stronger the tie between the referee and the

venture-capitalist, the stronger the referral.2. The stronger the tie between the referee and the

entrepreneur, the stronger the referral.3. The venture capitalist’s trust in the referee is

associated positively with investment decision.4. The impact of referee-venture capitalist tie on

referral will be greater in China than in Russia.5. The impact of referee-entrepreneur tie on

referral will be greater in China than in Russia.6. The impact of venture capitalist’s trust in the

referee on investment decisions will be greater in China than in Russia.

Variable use in research:Independent variables

Referee-venture capitalist tie

Referee-entrepreneur tieVenture capitalist’s trust in the referee

Dependent variablesInvestment selection

Control variablesVC firm ageThe entrepreneurial team scale

Method of analysis: Sample and data collection The result:

40% of private equity firms were fully or partially state-owned. The Chinese and Russian venture capitalists appeared to be experienced.

Two samples (china-Russia) significantly differ from each other in several variables. For example: Third-party referrals are stronger in Russia. However, the referee-venture capitalist tie is stronger in China.

The effect of dyadic ties on referral are significant and stable.

CONT’D VC firm size, IT industry, state ownership,

entrepreneurial team, and growth potential have significant and positive effect on investment decisions. Hypothesis 3: supported

Reveal that the effect of the predictor variable on the outcome variables are significant and positive, and the regression coefficients are the same in two countries. Hypothesis 4: not confirmed. Reveal that the effects of referee-entrepreneur tie are statically not significant in both Beijing and Moscow. Hypothesis 5: rejected.

Reveals that trust of referee has no impact on investment decisions in China. In contrast other model shows that venture capitalist’s trust in the referee has significant positive effect on the investment decision of Russian venture capitalists. Hypothesis 6: not supported.

Conclusions:An empirical proof of the hitherto untested

postulated of social network theory that transitivity is a function of tie strength and interpersonal trust.

Triads are transitive or not depends on the referee-investor relationship, referee-entrepreneur ties and trust in the third party.

The effects of dyadic ties and interpersonal trust on referral and investment decisions seems to be universal rather than country-or context specific, because industry factors have dominant effects on these outcomes variables.

Interpersonal trust has greater effect on dependent variable in Russia.

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