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• W248559048 abstract "ABSTRACTThis paper evaluates the relationship between corporate strategy and quantitative financial criteria for choosing the optimal set of projects for the Capital Budget. On the basis of the competitive dynamics of the industry and the corporate strategy, different sets of projects should be selected to compose the project portfolio. The choice of the best criteria for project selection is mandatory, even though it is hard to find in both corporate and academic literature recommendation about which criteria should be selected to fit a predefined strategy. In order to evaluate that, this paper analyzed several combinations of risk and return metrics to compare the resultant set of projects and their strategic implications. The results pointed out that while Net Present Value combined with Value at Risk provided the most relevant results in terms of long term value creation, it is important to figure out how different strategies can be best implemented through portfolios selected by other criteria - e.g., fast returns on investment obtained by the Adjusted Payback Period and high profitability based on the Profitability Index or Internal Rate of Return. Such results present a relevant contribution for managers who typically face with the Capital Budget problem.JEL: G11, G31KEYWORDS: Capital Budget, Project Portfolio Management, Project Portfolio Strategy, Project Selection, Monte Carlo Simulation, Investment Decision Criteria(ProQuest: ... denotes formulae omitted.)INTRODUCTIONThe current globalized economy poses the challenges of increased competition among companies, and the mobility of capital and changeability of stakeholders (Botzel and Schwilling 2000). Companies aim to create sustainable value in order to face such challenges. The long-term market value maximization of a company is the best criterion to equilibrate the tradeoffs among conflicting stakeholders, where value creation can be understood as the increase in a firm's market value, that is, the expectation of present and future cash flow generation (Brigham and Ehrhardt 2007; Hawawini and Viallet 2007). According to Porter (1980), companies competing in high growth industries may establish their position and increase the firm's market value through product development, marketing, innovation, acquisition of new clients, etc. Such companies are focused on growth; therefore, value creation is related to investments that aim for long-term cash flow generation. In addition to growth, if the industry is newly formed or emergent, risk appetite could increase because of the high level of uncertainties about the future. When competing in large revenue industries that are slow growing, companies look for economies of scale, cost efficiency, selective product improvements, retention and acquisition of profitable clients, etc. Value creation is related to efficiency in capital allocation, which means that investments are more selective, risk taking is an important concern, and profitability may be more important than simply growing revenues. On the other hand, if the industry's market is shrinking, or competition is severely damaging profitability, the companies would have to maintain or mitigate the decrease of value. Among the options, companies could change business lines, client segments, divest and capture residual value, etc. When investing in such situations, companies look for shortor medium-term returns; therefore, concerns about investment payback and divestment options may drive the capital budgeting process.Companies implement their investments through projects that have to be managed in a portfolio structure. Only the most favorable investments have to be chosen, since companies have limited resources. According to Pennypacker and Dye (2002), Chen and Jiang (2004), Almeida and Mota (2011) and Fagerholt et al. (2013), the main problems in project selection and portfolio management include the gap between strategy and investment selection, unprofitability, and unbalanced portfolios in terms of risk, schedule, and size of projects. …" @default.
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• W248559048 title "Strategic Implications of Project Portfolio Selection" @default.
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