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May 16, 2026Managerial Finance

Capital budgeting techniques: a proposal for improvement

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Authors

HLHongbok LeeWestern Illinois UniversityGMGisung MoonColumbus State University

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Implication

Proposal improves cash flow evaluations in financial management textbooks, indicating better real-world application.

Key Points

  • This paper aims to enhance the teaching of capital budgeting techniques to better align with real-world financial situations.
  • Reviewed capital budgeting techniques in major U.S. financial management textbooks.
  • Identified issues with the use of weighted average cost of capital (WACC) for net cash flow evaluations.
  • Proposed dual discount rates for operating cash flows and future investment outlays.
  • Found that WACC is only valid when project and firm cash flows have the same systematic risk.
  • Recommended discounting operating cash flows at WACC or a risk-adjusted rate, and future investments at the risk-free rate.
  • Provided a theoretical foundation for the suggested dual discount rates application.

Cite This Study

Lee et al. (2026) studied this question.

synapsesocial.com/papers/6a080a9fa487c87a6a40c91ehttps://doi.org/10.1108/mf-09-2025-0690
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