Investment Decisions in Small Business

Investment Decisions in Small Business

MARTIN B. SOLOMON
Copyright Date: 1963
Pages: 160
https://www.jstor.org/stable/j.ctt130hwvm
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  • Book Info
    Investment Decisions in Small Business
    Book Description:

    How to choose the investment that will give the best return is a problem faced by all businessmen. Yet for the small businessman in particular, the literature on capital budgeting intended to help him in his investment decisions seems not to apply to his actual situation. Here in this study, theory and practice are brought together within the context of small business.

    Author Martin B. Solomon Jr. compares two theoretically sound formulas -- present value and the discounted rate of return -- with simpler methods of calculating the returns on investments. The superiority of the refined methods, he points out, is practically nullified under the usual conditions of uncertainty. The primary need of the small businessman, Solomon concludes, is not for better methods of ranking alternatives but for the reservation of a portion of his time for seeking a variety of investment opportunities through the greater exercise of imagination and creativity.

    eISBN: 978-0-8131-6456-4
    Subjects: Business, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. FOREWORD
    (pp. v-vi)
    John E. Horne

    This studyhas been conducted and prepared under the direction of James W. Martin, project director for the University of Kentucky. The research was financed by a grant made by the Small Business Administration, United States Government, under the authority of Public Law 699 (85th Congress).

    Only a limited number of copies of this report have been printed. It is available for reference in any of the Small Business Administration offices throughout the United States or at many reference libraries. Copies of the report also may be purchased directly from the University of Kentucky Press, Lexington, Kentucky.

    Summaries of this...

  3. ACKNOWLEDGMENTS
    (pp. vii-viii)
    Martin B. Solomon Jr.
  4. Table of Contents
    (pp. ix-xii)
  5. 1 INTRODUCTION
    (pp. 1-4)

    THERE HAVEbeen numerous studies of investment, and theoretical tools have been developed for the analysis of investment decisions. Many of these tools emphasize profitability and acceptance criteria and say little about the search for investment alternatives, seemingly taking for granted that the businessman already possesses a number of investment possibilities. Most studies, too, stress the theoretical approach to investments and give comparatively slight attention to the actual behavior of firms in making investment decisions. Because of this emphasis upon the theoretical, perhaps, the practical businessman appears to give little recognition to and make little use of the analytical tools...

  6. 2 CAPITAL BUDGETING—AN OVERALL VIEW
    (pp. 5-11)

    CAPITALbudgeting is that part of financial management which deals with the investment of present funds in exchange for uncertain future returns. The term “investment” includes not only expenditures for buildings and equipment but also any expenditures, such as those for advertising and for research and development, which are expected to yield future returns. Although the term “capital budgeting” in theory may imply an orderly, well-planned, scientific program, in practice the approach to investment decisions is hardly so formal or so orderly. Some managements are unwilling or unable to apply the necessary theory; others are not even aware of its...

  7. 3 CAPITAL RATIONING FORMULAS—THEORETICALLY CORRECT METHODS
    (pp. 12-19)

    THE MOSTtechnical analysis in the current literature on investment is devoted to choosing among competing investment proposals. Many economists have given serious attention to the problem of profitability and acceptance criteria.¹ Since this function of capital budgeting lends itself to quantification, formulas have been most popular in the literature. This chapter reviews two methods for calculating profitability which have been accepted as theoretically sound—present value analysis and discounted rate of return analysis. Not only will the discussion serve to introduce some of the factors which need to be considered in comparing future profits, but the methods themselves offer...

  8. 4 CAPITAL RATIONING FORMULAS—ALTERNATIVE METHODS
    (pp. 20-48)

    THE DISCOUNTEDrate of return and present value methods are cumbersome and time consuming; alternative methods simplify the process of investment evaluation. The simplification of complex factors naturally reduces accuracy. Each of the alternative methods mentioned here fails to consider some of the factors such as the lower value of future income and various lengths of project life. Time can be an important consideration, but it also creates difficulties in ranking.

    The extreme uncertainty involved in many actual investment decisions may nullify the advantages of refined methods of analysis. Refined formulas require a forecast of incremental costs and revenues for...

  9. 5 SOME EMPIRICAL STUDIES OF INVESTMENT DECISIONS
    (pp. 49-56)

    ALTHOUGHnone of the empirical studies of investment decisions are concerned with small business, a review of the practices of large firms will be helpful in establishing a framework of reference and a point of departure for the empirical consideration of small business. Many economic principles hold true regardless of the size of the firm, yet it is also true that the small firm is not simply a miniature version of the large one and the economies of its operation must necessarily differ. The studies of big business have been of three types: surveys of rationing methods, case studies of...

  10. 6 UNCERTAINTY AND ERRORS OF ESTIMATION
    (pp. 57-92)

    WE HAVEshown earlier that the simpler techniques for investment evaluation may be useful tools of analysis; some provide relatively close estimates of the discounted rate of return and rank proposals in nearly the same order as would present value analysis. Even though these simpler, alternative methods are close approximations to refined measures, they are still approximations. Initially we answered this argument by indicating that the extra time and training necessary to use refined analysis cannot generally be afforded by the small businessman. Now we argue that the theoretical methods have limited practical valuebecause of the uncertainty involved in...

  11. 7 SEARCH ACTIVITY IN INVESTMENT DECISIONS
    (pp. 93-106)

    IN MAKINGinvestment decisions in small business, a critical consideration is sometimes the search function. Of the many possible types of search activity the investor is most actively engaged in seekingalternativesand in seekinginformation. Both of these types, of course, are closely associated with the function of evaluation.

    Acompletelyprogramed decision involves a routine procedure in which each step of the decision-making process is specified beforehand. This does not imply that the conclusion is predetermined, only the procedure. It is analogous to a computer program designed to solve some problem, each step of the program being specified....

  12. 8 THE INVESTMENT DECISION-MAKING COMPLEX—A CASE STUDY
    (pp. 107-119)

    THE CASEstudies covered up to this point have been concerned with one investment decision at a time and have frequently stressed only one aspect of the decision-making process. Investment decisions in actual business practice are much more complex, involving an overlapping sequence of diverse activity. There is no clear line between the time spent on other management activities and the time devoted to investment decisions. Within the maze of interrelated business activities, it is difficult to pick out the chain of events and decisions that leads to a particular investment.

    This chapter presents an intensive case study of one...

  13. 9 CONCLUSION
    (pp. 120-125)

    THUS FARcomments on two of the functions of capital budgeting, forecasting the supply and cost of capital and postauditing, are conspicuously absent from the discussion. The previous chapters have neglected the supply and cost of capital for several reasons. First, the subject is relatively undeveloped. Although a great deal of literature on the cost of capital exists, most of it is highly theoretical; there is little that is of practical value to the small businessman. John Lintner has published an excellent article that reviews most of the important developments in this area.¹ Second, the problem of budgeting funds for...

  14. APPENDIX A CONTINUOUS VERSUS DISCRETE DISCOUNTING
    (pp. 126-127)
  15. APPENDIX B THE INFINITE CHAIN
    (pp. 128-130)
  16. APPENDIX C CASE STUDIES
    (pp. 131-142)
  17. APPENDIX D VALUES FOR TABLES 4-3 AND 4-4
    (pp. 143-144)
  18. INDEX
    (pp. 145-148)