The Managerial Imperative of Evaluating Non-capital Expenditures within a Capital Budgeting Context

It has long been an accepted precept that the purpose of management is the maximization of shareholder wealth. Few would dispute the notion that projects requiring long-term capital investments should be subjected to capital budgeting. Numerous authors have, however, questioned the appropriateness of subjecting non-capital expenditures, such as advertising, research or product development, to capital budgeting analysis. These studies have suggested that it is inappropriate to evaluate expenditures with uncertain outcomes, such as advertising, research and product development, with a technique as rigorous as net present value. The present study contends that it is not only appropriate to evaluate non-capital expenditures using capital budgeting techniques but it is essential for firm survival. Furthermore, despite difficulty in applying capital budgeting to advertising or R&D expenditures, no other analytical technique is superior to capital budgeting in determining the effect of expenditures on the financial performance of the firm.