HANDBOOK OF GERMAN BUSINESS MANAGEMENT

Transcription

1 HANDBOOK OF GERMAN BUSINESS MANAGEMENT Volume 1 A-Κ Edited by Erwin Grochla Managing Editor Hans E. Büschgen Klaus Chmielewicz Adolf G. Coenenberg Werner Kern Richard Köhler Eduard Gaugier Managing Editor Heribert Meffert Marcell Schweitzer Norbert Szyperski Waldemar Wittmann Klaus v. Wysocki C. E. Poeschel Verlag Stuttgart Springer-Verlag Berlin Heidelberg New York London Paris Tokyo Hong Kong

2 Contents Column numbers are indicated after each article title Survey Articles The Economic and Social Structure of the Federal Republic of Germany 1-34 Horst Albach Organisation of the Economy in the Federal Republic of Germany Erwin G roch I a The Structure of/and Institutions for Business Administration in German-Speaking Countries Eduard Gaugler Subject Articles Accounting Klaus Dellmann Accounting for Planning and Control Michael Wohlgemuth Accounting Policy Günter Sieben ADP-Application Systems Dietrich Seibt Advanced Vocational Training Wolfgang Weber Advertising Wem er Kroeber- R iel Agricultural Management Erwin Reisch Annual Audit Hans Η avermann Appraisal System Werner R. Müller Assets Edmund Η einen Audits Erich Loitlsberger Banks and Banking System Hans E. Büschgen Bookkeeping Michael Heinhold Brand Policy Ludwig Berekoven Budgeting Detlef Müller- Böling Business Accounting Principles and Standards Manfred Layer Business Administration: History in German-Speaking Countries Horst Albach Business Administration: Present Theoretical Approaches Günter Wöhe Business Informatics Joachim Griese Business Policy, Business Politics Günter Dlugos Business Start-Up Erich Zahn Business Statistics Eberhard Schaich Business Taxation Lutz Fischer Cameralistics Karl Oettle Capacity Ludwig Pack Capital Budgeting Klaus Lud er Capital Budgeting Techniques Bernd Rudolph f I Capital Market Wolfgang Gerke Capital Market Theory \ Herbert Hax

3 XXIII Contents XXIV Codetermination Klaus Chmielewicz Collective Bargaining Ernst Zander Commercial Accounts Klaus v. Wysocki Communication Systems Eberhard Witte Competition Hermann Simon Concepts of Profit Gerhard Scherrer Consolidated Accounts Walther Busse v. Cölbe Consumers Hans Raffee Contractual Vertical Marketing Systems Bruno Tietz Contribution Costing Wolfgang Kilger Controllership Peter Horvath Conversion Anton Heigl Cooperative Associations Ernst-Bernd Blumle Cooperative Management Wilfried Krüger Coordination Hans-Jürgen Drumm Corporate Governance Horst Steinmann Corporate Modelling Friedrich Rosenkranz Corporate Objectives Edmund Heinen Cost Accounting Gerhard Seicht * Cost of Capital Erich Swoboda Cost Estimating Herbert Vormbaum Cost Management Lothar Streitferdt Cost Theory Marcel I Schweitzer Customer Service Peter Hammann Data Banks and Method Banks Peter Mertens/Hartmut Wedekind Data Processing Management Dieter B. Pressmar Debt Capital Anton Egger Decision Theory Eberhard Witte Demand for Capital Wolfgang Eisele Development Projects Karl-Heinz Sohn Distribution Dieter Ahlert Division of Labour and Responsibilities Arnold Picot Early Warning Systems Reinhart Schmidt Efficiency Franz Xaver Bea Employee Shareholding Günther Schanz Employee Suggestion Schemes Norbert Tlwm Employers' Associations Rolf Rodenstock Energy Supply Werner Kern Environmental Protection Heinz Strebel ^Equity Capital Jochen Drukarczyk Ergonomics Walter Rohmen European Communities Herbert Biener Evaluation Techniques Winfried Matthes Expenses and Revenues Helmut Kurt Weber Export Promotion Hans Günther Meissner Financial Accounting Theories Ma reel I Schweitzer Financial Analysis Robert Büchner Financial Management Friedrich Tliomee Financial Planning Wolfgang Lücke Financial Report Edgar Castan Financial Statement Analysis Adolf G. Coenenberg Financing Hans E. Büschgen

4 XXV Contents XXVI Forecasting Techniques Udo Winand Foreign-Exchange Management Helmut Lipjert Forestry Management Werner Kroth Fringe Benefits Wolfgang H. Staehle Funds Flow Statement Walther Busse v. Cölbe Generally Accepted Auditing Standards Karl-Heinz Forst er Generating Alternatives Jürgen Hauschildt Group Werner Schubert Hospital Management Dietrich Adam Humanisation of Work Herbert Kubicek Implementation Eduard Gabele Industrial Firms Dietger Hahn Industrial Marketing Werner Hans Engelhardt Industrial Property Rights Η ans-η orst Schröder Industrial Sociology Friedrich Fürstenberg Inflation Accounting TJwmas Schi Id bach Information Systems Norbert Szyperski Innovation Wilhelm Bierfelder Insolvency Wilhelm Uhlenbruck Insurance Dieter Farny Integrative Planning Dietger Hahn Inter-Firm Cooperation Peter Schwarz Inter-Firm and Intra-Firm Comparisons Karl Vodrazka Internal Audit Andre Zünd International Accounting Klaus Macharzina Internationa] Marketing Hans Günther Meissner Inventory Management Wolfgang v. Zwehl Job Design Ralf Reich wald Job Evaluation Rainer Man Labour Law Reinhard Richardi Labour Market and Unemployment Gerhard Brinkmann Leadership Rolf Wunderer Leasing Winfried Μ el I wig Legal Forms of German Business Organisation Marcus Lutter Legal Requirements for Production Klaus Stüdemann Liquidity Wolfgang Stützet Loans and Credit Η ans-jacob Krümmel Logistics Gösta Β. Ihde Maintenance August-Wilhelm Sehe er Make or Buy Friedrich Wilhelm Selchert Management Knut Bleicher Management Consultancy Günter Sieben Marketing Planning Richard Köhler Marketing Theory Heribert Meffert Market Research Franz Böcker Markets Heribert Meffert Materials Management Oskar Grün Mechanisation and Automatisation Erich Staudt Merger Ehrenfried Pausenberger Motivation Gerhard Reber * Multinational Corporations Martin K. Welge

5 XXVII Contents XXVIII Non-Profit Organisations Karl Oettle Occupational Safety Peter C. Compes Office Management Herbert Kraus Old Age Benefits Georg Heubeek Operational Research Applications Heiner Müller-Μerbach Operational Research Modelling Werner Dinkelbach Organisational Culture Alfred Kieser Organisational Design Erwin Grochla Organisational Development Hartmut Wächter Organisational Forms Knut Bleicher Organisational Structure Friedrich Hoffmann Organisational Techniques Robert Fieten Organisation Theory Erwin Grochla Partnerships and Sole Traders Otto H. Jacobs Payments Transactions and Clearing Systems Wolf gang Ben η er Personnel Costs Eduard Gaugier Personnel Information Systems Michel Domsch Personnel Management Jürgen Bert hei Personnel Planning Wolfgang Mag Personnel Policy Dudo v. Eckardstein Planning Systems Edwin Rühli Plant Closure Tliomas Raiser Plant Location Jürgen Bloech Plant Management Wolfgang Männel Plant Models Gert Laßmann Portfolio Management Aloys Gä l weil er Pricing Policy Herbert Jacob Principles of Proper Bookkeeping and Accounting Jörg Baetge Privacy and Data Security Rainer Thome Private Limited Company Manfred Jürgen Matschke Process Organisation and Scheduling Hans- Ulrich Küpper Procurement Horst Glaser Product Design Hans Siegwart Production Werner Kern Production Planning and Control Helmut Wagner Production Processes Kurt Bohr Production Theory Waldemar Wittmann Product-Mix Planning Hermann Sabel Profit and Loss Account Klaus Chmielewicz Profit and Loss Appropriation Ralf Bodo Schmidt Profit Sharing Eduard Gaugier Project Management Erich Frese Psychology of Industrial Organisations Lutz v. Rosenstiel Public Aid for Small and Medium-Sized Firms Erwin Dicht I Public Auditing Klaus v. Wysocki Public Authority Peter Eichhorn Public Limited Company Eberhard Duffer Public Procurement Helmut Die de rich Public Relations Volker Trommsdorff Quality Control Horst Wildemann

6 XXIX Contents XXX Rationalisation Μ α reell Sah weitzer Ratios Thomas Reichmann Reconstruction Johann Heinrich v. Siein Recycling Erich Staudt Research and Development Klaus Brockhoff Research Methods in Business Administration Richard Köhler Restraint of Trade Günther Bemert Sales Management Joachim Zentes Sales Promotion Hermann Diller Service Industry Wilhelm Hill Short-Term Operational Accounting Dietrich Börner Size of the Firm Horst See Ibach Social Accounting Adolf G. Coenenberg Social Legislation Georg Wannagat Standard Chart of Accounts Walter Endres Standard Costing Josef Kloock Standardisation Hartmut Kreikebaum State-Owned Enterprises Tlieo Tiiiemeyer Strategic Analysis Hans-Christian Pfohl Strategic Management Werner Kirsch Subject Matter of Business Administration Hans Ulrich Subsidies Karl Alew ell Supervision Alfred Kuhn Systems Theory Helmut Lehmann Tax Balance Sheet Franz W. Wagner Tax Planning Gerd Rose Technology Transfer Hans H. Hin terh über Tourism Josef Mazanec Trade and Craft Peter Rütger Wossidlo Trade Unions Ekkehard Kappler Trading Enterprises Fritz Klein-Blenkers Transport Corporations Paul Riebel Valuation Helmut Koch Valuation of a Going Concern Adolf Μ oxter Vocational Training Heinrich Schanz Wage-Payment Systems Karl-Friedrich A ckermann Wage and Salary Policy Hugo Kossbiel Working Time Dieter Sadowski Work Structuring Hans Blohm Author Index Subject Index Contributors' Addresses

7 List of Contributors Column numbers are indicated after each article title. For contributors' addresses, see pp Ackermann, Karl-Friedrich Prof. Dr. Wage-Payment Systems Adam, Dietrich Prof. Dr. Hospital Management Ahlert, Dieter Prof. Dr. Distribution Alhach, Horst Prof. Dr. Dr. h. c. mult. The Economic and Social Structure of the Federal Republic of Germany 1-34 Business Administration: History in German Speaking Countries Alewell, Karl Prof. Dr. Dr. h. c. Subsidies Baetge, Jörg Prof. Dr. Principles of Proper Bookkeeping Bea, Franz Xaver Prof. Dr. Efficiency Benner, Wolfgang Prof. Dr. Payment Transactions and Clearing Systems Berekoven, Ludwig Prof. Dr. Brand Policy Bemert, Günther Prof. Dr. Restraint of Trade Berthel, Jürgen Prof. Dr. Personnel Management Biener, Herbert Ministerialrat European Communities Bierfelder, Wilhelm Prof. Dr. Innovation Bleicher, Knut Prof. Dr. Management Organisational Forms Bloech, Jürgen Prof. Dr. Plant Location Blohm, Hans Prof. Dr. Work Structuring Blümle, Ernst Bernd Prof. Dr. Cooperative Associations Böcker, Franz Prof. Dr. Market Research Bohr, Kurt Prof. Dr. Production Processes Börner, Dietrich Prof. Dr. Short-Term Operational Accounting Brinkmann, Gerhard Prof. Dr. Labour Market and Unemployment Brockhoff, Klaus Prof. Dr. Research and Development Büchner, Robert Prof. Dr. Financial Analysis Büschgen, Hans E. Prof. Dr. Banks and Banking System Financing Busse v. Cölbe, Walther Prof. Dr. Dr. h. c. Consolidated Accounts Funds Flow Statement Cast an, Edgar Prof. Dr. Financial Report Chmielewicz, Klaus Prof. Dr. Codetermination Profit and Loss Account Coenenberg, Adolf G. Prof. Dr. Financial Statement Analysis Social Accounting Compes, Peter C Prof. Dr. Occupational Safety Dellmann, Klaus Prof. Dr. Accounting Dichtl, Erwin Prof. Dr. Public Aid for Small and Medium- Sized Firms Diederich, Helmut Prof. Dr. Public Procurement Diller, Hermann Prof. Dr. Sales Promotion Dinkelbach, Werner Prof. Dr. Operational Research Modelling Dlugos, Günter Prof. Dr. Business Policy, Business Politics Domsch, Michel Prof. Dr. Personnel Information Systems Drukarczyk, Jochen Prof. Dr. Equity Capital Drumm, Hans Jürgen Prof. Dr. Coordination

8 XXXV List of Contributors XXXVI Dülfer, Eberhard Prof. Dr. Public Limited Company v. Eckardstein, Dud ο Prof. Dr. Personnel Policy Egger, Anton Prof. Dr. Debt Capital Eichhorn, Peter Prof. Dr. Public Authority Eisele, Wolfgang Prof. Dr. Demand for Capital Endres, WalterProf. Dr. Standard Chart of Accounts Engelhardt, Werner Hans Prof. Dr. Industrial Marketing Fa my, Dieter Prof. Dr. Insurance Fie ten, Robert Dr. Organisational Techniques Fischer, Lutz Prof. Dr. Business Taxation Forst er, Karl-Heinz Prof. Dr. Dr. h. c. Generally Accepted Auditing Standards Frese, Erich Prof. Dr. Project Management Fürstenberg. Friedrich Prof. Dr. Industrial Sociology Gabele, Eduard Prof. Dr. Implementation Gälweiler, Aloys Prof. Dr. Portfolio Management Gaugier, Eduard Prof. Dr. Dr. h. c. The Structure of/and Institutions for Business Administration in German-Speaking Countries Personnel Costs Profit Sharing Gerke, Wolfgang Prof. Dr. Capital Market Glaser, Horst Prof. Dr. Procurement Griese, Joachim Prof. Dr. Business Informatics Grochla, Erwin Prof. Dr. Dr. h. c. mult. Organisation of the Economy in the Federal Republic of Germany Organisational Design Organisation Theory Grün, Oskar Prof. Dr. Materials Management Hahn, Dietger Prof. Dr. Industrial Firms Integrative Planning Hammann, Peter Prof. Dr. Customer Service Hauschildt, Jürgen Prof. Dr. Generating Alternatives Havermann, Hans Prof. Dr. Annual Audit Hax, Herbert Prof. Dr. Capital Market Theory Heigl, Anton Prof. Dr. Conversion Heinen, Edmund Prof. Dr. Dr. h. c. mult. Assets Corporate Objectives Heinhold, Michael Prof. Dr. Bookkeeping Heubeck, Georg Prof. Dr. Old Age Benefits Hill, Wilhelm Prof. Dr. Dr. h. c. Service Industry Hint erhübet; Hans H. Prof. Dr. Technology Transfer Hoffmann, Friedrich Prof. Dr. Organisational Structure Horvath, Peter Prof. Dr. Controllership Hide, Gösta Β. Prof. Dr. Logistics Jacob, Herbert Prof. Dr. Dr. h. c. Pricing Policy Jacobs, Otto H. Prof. Dr. Partnerships and Sole Traders Kappler, Ekkehard Prof. Dr. Trade Unions Kern, Werner Prof. Dr. Energy Supply Production Kieser, Alfred Prof. Dr. Organisational Culture Kilger, Wolfgang Prof. Dr. Contribution Costing Kirsch, Werner Prof. Dr. Strategic Management Klein-Blenkers, Fritz Prof. Dr. Trading Enterprises Kloock, JosefProf. Dr. Standard Costing

9 χχχνπ List of Contributors XXXVIII Koch, Helmut Prof. Dr. Dr. h. c. Valuation Köhler, Richard Prof. Dr. Marketing Planning Research Methods in Business Administration Kossbiel, Hugo Prof. Dr. Wage and Salary Policy Kraus, Herbert Prof. Dr. Office Management Kreikebaum, Hartmut Prof. Dr. Standardisation Kroeber-Riel, Werner Prof. Dr. Advertising Kroth, Werner Prof. Dr. Forestry Management Krüger, Wilfried Prof. Dr. Cooperative Management Krümmel, Η ans-jacob Prof. Dr. Dr. h. c. Loans and Credit Kubicek, Herbert Prof. Dr. Humanisation of Work Kuhn, Alfred Prof. Dr. Supervision Küpper, Hans-Ulrich Prof. Dr. Process Organisation and Scheduling Laßmann, Gert Prof. Dr. Plant Models Layer, Manfred Prof. Dr. Business Accounting Principles and Standards Lehmann, Helmut Dr. Systems Theory Lipfert, Helmut Prof. Dr. Foreign-Exchange Management Loitlsberger, Erich Prof. Dr. Dr. h. c. Audits Lücke, Wolfgang Prof. Dr. Financial Planning Lüder, Klaus Prof. Dr. Capital Budgeting Lutter, Marcus Prof. Dr. Legal Forms of German Business Organisation Macharzina, Klaus Prof. Dr. International Accounting Mag, Wolfgang Prof. Dr. Personnel Planning Männel, Wolfgang Prof. Dr. Plant Management Man, Rainer Prof. Dr. Job Evaluation Matschke, Manfred Jürgen Prof. Dr. Private Limited Company Matt lies, Winfried Prof. Dr. Evaluation Techniques Mazanec, Josef Prof. Dr. Tourism Meffert, Heribert Prof. Dr. Marketing Theory Markets Meissner, Hans Günther Prof. Dr. Export Promotion International Marketing Mellwig, Winfried Prof. Dr. Leasing / Mertens, Peter Prof. Dr. Data Banks and Method Banks Μ oxter, AdolfProf. Dr. Valuation of a Going Concern Müller, Werner R. Prof. Dr. Appraisal System Müller-Böling, DetlefProf. Dr. Budgeting Müller-Μerbach, Heiner Prof. Dr. Operational Research Applications Oettle, Karl Prof. Dr. Cameralisms Non-Profit Organisations Pack, Ludwig Prof. Dr. MBA Capacity Pausenberger, Ehrenfried Prof. Dr. Merger ' Pfohl, Hans-Christian Prof. Dr. Strategic Analysis Picot, Arnold Prof. Dr. Division of Labour and Responsibilities Pressmar, Dieter B. Prof. Dr. Data Processing Management Raffee, Hans Prof. Dr. Consumers Raiser, Thomas Prof. Dr. Plant Closure Reber, Gerhard Prof. Dr. MBA Motivation Reichmann, Tliomas Prof. Dr. Ratios Reichwald, RalfVxoL Dr. Job Design

10 XXXIX List of Contributors XL Reisch, Erwin Prof. Dr. Dr. h. c. Agricultural Management Richardi, Reinhard Prof. Dr. Labour Law Riehel, Paul Prof. Dr. Dres. h. c. Transport Corporations Rodenstock, Rolf ProL Dr. Dr. h. c. Employers' Associations Rohmert, Walter Prof. Dr. Ergonomics Rose, Gerd Prof. Dr. Tax Planning Rosenkranz, Friedrich Prof. Dr. Corporate Modelling v. Rosenstiel, Lutz Prof. Dr. Psychology of Industrial Organisations Rudolph, Bernd Prof. Dr. Capital Budgeting Techniques Riihli, Edwin Prof. Dr. Planning Systems Sabel, Hermann Prof. Dr. Product-Mix Planning Sadowski, Dieter Prof. Dr. Working Time Schaich, Eberhard Prof. Dr. Business Statistics Schanz, Günther Prof. Dr. Employee Shareholding Schanz, Heinrich Prof. Dr. Vocational Training Scheer, August-Wilhelm Prof. Dr. Maintenance Scherrer, Gerhard Prof. Dr. Concepts of Profits Schildbach, Tlwmas Prof. Dr. Inflation Accounting Schmidt, Ralf-Bodo Prof. Dr. Profit and Loss Appropriation Schmidt, Reinhart Prof. Dr. Early Warning Systems Schröder, Hans-Horst Dr. Industrial Property Rights Schubert, Werner Prof. Dr. Group Schwarz, Peter Priv. Doz. Dr. Inter-Firm Cooperation Schweitzer, Marcell Prof. Dr. Cost Theory Financial Accounting Theories Rationalisation Seelbach, Horst Prof. Dr. Size of the Firm Seibt, Dietrich Prof. Dr. ADP-Application Systems Seicht, Gerhard Prof. Dr. Cost Accounting Selchert, Friedrich Wilhelm Prof. Dr. Make or Buy Sieben, Günter Prof. Dr. Accounting Policy Management Consultancy Siegwart, Hans Prof. Dr. Product Design Simon, Hermann Prof. Dr. Competition Sohn, Karl-Heinz Prof. Dr. Development Projects Staehle, Wolfgang H. Prof. Dr. Fringe Benefits Staudt, Erich Prof. Dr. Mechanisation and Automatisation Recycling v. Stein, Johann Heinrich Prof. Dr. Reconstruction Steinmann, Horst Prof. Dr. Corporate Governance Strebel, Heinz Prof. Dr. Environmental Protection Streitferdt, Lothar Prof. Dr. Cost Management Stüdemann, Klaus Prof. Dr. Legal Requirements for Production Stützet Wolfgang Prof. Dr. Liquidity Swoboda, Peter Prof. Dr. Cost of Capital Szyperski, Norbert Prof. Dr. Information Systems Tlnemeyer, Tlieo Prof. Dr. State-Owned Enterprises Thorn, Norbert Prof. Dr. Employee Suggestion Schemes Timme, Rainer Prof. Dr. Privacy and Data Security Tliomee, Friedrich Prof. Dr. Financial Management Tietz, Bruno Prof. Dr. Contractual Vertical Marketing Systems Trommsdorff, Volker Prof. Dr. Public Relations

11 XLI List of Contributors XLII Uhlenbruch, Wilhelm Prof. Dr. Insolvency Ulrich, Hans Prof. Dr. Dr. h. c. mult. Subject Matter of Business Administration Vodrazka, Karl Prof. Dr. Inter-Firm and Intra-Firm Comparisons Vormbaum, Herbert Prof. Dr. Cost Estimating Wächter, Hartmut Prof. Dr. Organisational Development Wagner, Franz W. Prof. Dr. Tax Balance Sheet Wagner, Helmut Prof. Dr. Production Planning and Control Wannagat, Georg Prof. Dr. Social Legislation Weber, Helmut Kurt Prof. Dr. Expenses and Revenues Weber, Wolfgang Prof. Dr. Advanced Vocational Training Wedekind, Hartmut Prof. Dr. Data Bank and Method Banks Welge, Martin K. Prof. Dr. Multinational Corporations Wildemann, Horst Prof. Dr. Quality Control Witte, Eberhard Prof. Dr. Dres. h.c. Communication Systems Decision Theory Wittmann, Waldemar Prof. Dr. Dres. h. c. Production Theory Wöhe, Günter Prof. Dr. Dres. h. c. Business Administration: Present Theoretical Approaches Wohlgemuth, Michael Prof. Dr. Accounting for Planning and Control Wossidlo, Peter Rütger Prof. Dr. Trade and Craft Wunderer, RolfVvoL Dr. Leadership v. Wysocki, Klaus Prof. Dr. Commercial Accounts Public Auditing Zahn, Erich Prof. Dr. Business Start-Up Zander, Ernst Prof. Dr. Collective Bargaining Zentes, Joachim Prof. Dr. Sales Management Zünd, Andre Prof. Dr. Internal Audit v. Zwehl, Wolfgang Prof. Dr. Inventory Management Winand, Udo Dr. Forecasting Techniques

12 373 Capital Budgeting Techniques 374 From this sequence of events it can be inferred that investment appraisals are no more than an aid in the preparation of investment decisions. In actual investment decisions other considerations, which, at best, can only be partially allowed for in a quantitative project evaluation, are taken into account. For example, other or more far-reaching objectives can be pursued than those reflected in the computational procedure; or, particular interdependencies with other of the firm's decision areas, which ought in fact to be taken into account in the decision, may be omitted from the quantitative project evaluation. The development of increasingly comprehensive models for eliminating these deficiencies is the objective of (micro-)capital budgeting theory. For example, this body of theory has developed decision models Capital Budgeting Techniques Bernd Rudolph [see also: Budgeting; Capital Budgeting; Cost of Capital; Maintenance) /. Objectives of Capital Budgeting Techniques; II. Basic Assumptions of Capital Budgeting Techniques; III. Methods of Project Evaluation; IV. Outlook. I. Objectives of Capital Budgeting Techniques - which are based on the explicit assumption that the investor pursues several objectives (Dinkelbach 1982) or wishes to take cognizance of the objectives of those who are external to the Firm (Picot 1976), - which can handle the interdependency problem, in particular, between investment and financing decisions (Albach 1962; Hax 1964), or - which can explicitly allow for the uncertainty inherent in the data used for investment appraisal (Albach 1959). In contrast to the model-building of capital budgeting theory, the development of capital budgeting techniques is intended more for dealing with the practical aspects of decision making and to a lesser extent for dealing with decision interdependencies. The intention is to confine the information requirements and the computational cost of the investment appraisals within nar- The quantitative methods of Capital Budgeting are an aid to prepare rational investment decisions. A multiplicity of different investment appraisal methods is described in the business administration literature and applied in practice. This paper gives an overview of these methods and pays special attention to those that are characteristic of the German Capital Budgeting literature. Set up Reccurrent Supplementary Investment appraisal techniques can be serially classified as one of a sequence of tasks in the capital investment area (Blohm/Lüder 1983): Replacement Major repairs and overhauls - stimulus of an investment proposal, - obtaining the technical and economic data for investment computations, - preliminary choice of investment projects, - project appraisal, - reconciliation of the investment proposal with overall planning, - investment decision, - implementation of the investment decision, - surveillance of the investment project, and - investment control. Expansion Rationalisation Conversion Re-arrangement Figure 1: Classification of Investments Safety Diversification

13 375 Capital Budgeting Techniques 376 row limits. To make sure that the results of project evaluation can be correctly interpreted and accepted by all the departments affected within a firm, they must be clearly and usably presented and be based upon data which are self-evident in the computations themselves. Project evaluations can be undertaken for desired investment objectives. Figure 1 (Kern 1976) classifies kinds of investment in accordance with intention and makes it clear that the implementation of practical investment appraisals is, at any given time, tied up with other difficulties. 2. Fundamentals from Financial Mathematics By calculating interest and compound interest, a given cash flow stream e 0, e b, e,,, e T can be summarised as a single amount. The point in time to which the cash flows are compounded or discounted is called the reference date. If one chooses as a reference date the terminal date of the cash flow sequence, the summarising amount is described as a terminal value. If i is the interest rate that is used for evaluating the cash flow stream, the terminal value is computed from II. Basic Assumptions of Capital Budgeting Techniques 1. Cash Flow Analysis Quantitative project evaluation methods are based on an analysis of the inflows and outflows of cash that are ascribable to the investment projects. As a rule an investment's cash flow sequence begins with an acquisition payment which includes the project's appraisal cost, its acquisition or production cost and its installation cost. The acquisition payment is formally represented with a 0 whereby the subscript t = 0 fixes both the payment date and the point in time to which the investment computation relates. In the subsequent periods t= 1, 2,... net cash inflows e t are generated by the project which, for computational simplicity, are assumed to arise at the end of the period in question. At the end of the investment's service life Γ the project is disposed of and, as the case may be, a disposal value 1 T should be taken into account. A cash flow sequence of the form a 0, e h e 2,..., e T, 1 T is routine, but generally not a necessary condition for the use of investment appraisal procedures. Hence, cash flow sequences commencing with an inflow, or those having negative net cash flows in individual periods, can be accounted for. In the interests of clarity, and in order to avoid complications in calculating rates of return, cash flow sequences of the form a 0, e b e 2,, e T, 1 T are assumed hereafter. Frequently it is not possible to ascertain what proportions of periodic net cash flows are causally ascribable to an individually analysed project and to other assets respectively. The possibility of systematic errors in project evaluations cannot therefore be ruled out. But, in the case of decisions on individual investment projects, the problem of ascribing cash flows is unimportant because it is a question of valuing the effects of an investment decision rather than valuing an investment project. Thus, the cash flow stream of an investment project can always at least be arrived at by taking the difference between the firm's periodic net cash flows with, and without, the implementation of that project (Engels 1962; Kruschwitz 1978). Ετ Σ e t (l+i) T-t (1) t = 0 The expression (l+i) T _ t is defined as a compounding factor. If the point in time immediately before the first cash flow is chosen as the reference date, the summarising amount is described as a net present value. E 0 = Σ eto+o- 1 - (2) The expression (l + i) _ l is described as a reverse compounding or discount factor. The connection between the terminal value E T of a cash flow sequence and its present value E 0 is represented by E T = (l-fi) T Eo. (3) If the reference date is arbitrarily chosen, the summarising amount is described as project balance. The project balance of a cash flow stream at point in time t* is given by E t *= Σ e t (l+i) l *- l = (1+if E 0. 1 = 0 A constant cash flow stream e, = c for t= 1, 2, 3, T, is described as an annuity. The present value of a cash flow stream e, = c is E 0 = c Σ (1+!)-* = ( 1 + ϊ ) Γ J, tii i(l+0 T whereby the expression [(1+i) T l]/i (1 + i) T is described as the Τ year annuity factor. At times the present value of a cash flow stream is known and a computation of its annuity value is required. The required value is obtained by solving equation (5) for the annuity c, that is, c=e 0 i(1+i) T (6) 0+i) T -l whereby the quotient i (1 + i) T /[(l + i) T - 1] is described as the recovery factor. If a constant cash flow stream e t = c is of infinite duration (perpetuity), its present value is equal to E 0 = c Σ (1+0- t=l (4) (5) (7)

14 377 Capital Budgeting Techniques 378 It may be the case that the interest rate for evaluating a cash How stream does not take on the same value in all periods. If i t is the interest rate of the t-th period, the present value of the cash flow sequence is computed from E () = Σ e t (1 + l,r l (8)!=() where, (1 4-1^ = 0 + i,) (1 + i 2 )....(1 +i t ). The first substantiation of the properties of discounting, and therefore the first kernel of investment computations, is attributable to Gottfried Wilhelm Leibniz (mi) (Schneider, D. 1981). In German business administration the procedures of financial mathematics were originally (and mainly) popularised by Schneider, E. (1951) who, to a significant extent, built on the work of Boulding (1935). III. Methods of Project Evaluation 1. Decision Problems in the Investment Area Project evaluations are prepared for a variety of business decision-making situations. In the literature of business administration, four particular decision-making situations are explored: (1) Project evaluations for the appraisal of the merits of individual investment projects to facilitate decisions on their acceptance or rejection. (2) Project evaluations for the choice between mutually exclusive projects that are intended to facilitate a decision on which of several investment projects should be implemented when, for non-financial reasons, the acceptance of a single project alone is possible, i.e. the cash flow stream of only one of the possible projects can be realised. (3) Project evaluations for the determination of the optimal service life of an investment, or for determining an asset's optimal replacement date, can formally be derived by reference to the choice between mutually exclusive projects because investment computations always relate to the cash flow effects and not to investment projects. (4) Project evaluations for decisions on the implementation of investment projects in conditions of capital rationing, or when funds can only be obtained on special terms, require programming solutions which can only be taken by resort to multiple project capital budgeting procedures. Such decisions are not the subject of this article. Strictly speaking all business decision-making problems should be solved by resort to simultaneous planning because the funds available to firms are always limited in which case a budgetary allocation process ( Budgeting) must be undertaken. On the other hand, many situations are to be found in practice in which available finance clearly does not constitute a binding constraint. In these situations the Cost of Capital, i.e. the discount rate for investment computations, can be equated with the effective rate of interest on externally-raised funds and investment computation procedures can be successfully applied in dealing with decision-making situations (1), (2), and (3). 2. Project Evaluation Methods Based on Financial Mathematics Dynamic (financial/mathematical, multiperiod, classical) methods of investment computation are represented by - the net present value method, - the annuity method, - the internal rate of return method. The net present value and annuity methods represent applications of the present value approach which presume knowledge of a predetermined discount rate. In contrast, the internal rate of return method is a self-reliant procedure which, in a comparison of alternative, does not always give the same signal as the net present value method. a) The Net Present Value Method An investment's net present value K () is defined by the sum of all discounted receipts and payments ascribable thereto as at the point in time immediately preceding the first cash flow. K =-a + Σ etu+ir'+mi+ir 7 (9) t = ι a 0 - acquisition payment as at point in time t = 0; e ( - excess of receipts over payments ascribable to the project in period t; 1 T - residual value of the project at point in time T; Τ - service life of the investment; i - discount rate. The following propositions follow directly from equation (9): - An investment's net present value is equal to the present value of the sequence of cash flows ascribable to that investment. - An investment's net present value is equal to the present value of its receipts minus the present value of its payments. - An investment's net present value is the amount which, in addition to the initial payment a 0, can be repaid with interest from its subsequent net cash inflows. If the net present value method is used in the three previously described decision-making situations, the following decision rules apply: (1) An investment project is an economically viable alternative if the net present value K 0 of its cash flow sequence is positive.

15 379 Capital Budgeting Techniques (2) If two, or more, investment projects are mutually exclusive, the project with the highest net present value should be chosen. It can be shown that the choice between two mutually exclusive projects can be reduced to a decision on individual projects evaluated in isolation (Max 1979). (3) The inflows and outflows of cash that are ascribable to an investment project are not always invariable data from a firm's standpoint. In particular, a firm can frequently determine an investment project's service life T. A distinction is made between the - technical service life which represents the timespan during which an asset can be operated in a technical sense (the technical service life can almost be extended indefinitely by means of repairs and the replacement of components) and the - economic service life which is the time-span during which an asset can be operated economically. The optimal life of an investment project is the timespan at which its net present value is at maximum. The maximum net present value, and therefore the optimal service life of investment projects, depends upon whether, and how, frequently an asset should be replaced (Schneider, D. 1980). b) The Annuity Method An annuity that is equivalent to a cash flow sequence a (), ei, e 2,, e T is defined by a series of equal cash flows c over Τ periods and has a net present value which is equal to that of the original sequence. The equivalent annuity c is given by: Ko=-a + Xcll+ir' + MI+ir 1 ' (10) t = ι ι=ι whence, i(1+0 Because the annuity c is, for any given service life T, a positive linear transformation of the net present value Ko, it follows, - that an investment is economically viable if the equivalent annuity is positive, and - that in the case of two mutually exclusive projects of equal duration the one offering the higher annuity is the more advantageous. c) The Internal Rate of Return Method The internal rate of return r of a cash flow sequence is defined as the discount rate at which the net present value of that sequence is zero and is therefore given by: K 0 =-a 0 + Σ e t (l+r)- l = 0. (12) t=1 The internal rate of return indicates the effective interest rate of return on invested capital and therefore the average rate of return on average capital employed. If a cash flow sequence comprises a payment followed by a receipt at the following point in time, the internal rate of return denotes the degree of profitability. In the case of a monotonically decreasing net present value function, the internal rate of return exceeds the discount rate as long as the net present value is positive. Hence, an investment is economically viable if its internal rate of return is greater than the discount rate. In the case of mutually exclusive investment projects, the project with the highest internal rate of return is not necessarily the most profitable. A ranking of investment projects by internal rate of return can therefore conflict with a ranking in accordance with the net present value method and suggest a scale of preferences which may not actually be valid. 3. Static Project Evaluation Procedures Static (simple, single-period, accounting) investment computational procedures are exemplified by methods developed and frequently used in practice, namely, - cost comparison statement, return on investment, pay-back period. A significant characteristic of all static investment computational procedures is that they neglect the exact timing of the receipts and payments ascribable to an investment. Instead of cash flows they make use of average periodic costs and average periodic revenues (or periodic proceeds). Frequently the estimated costs and revenues of the first period e.g. of the first year following the installation of an asset, are taken as average values. The static procedures are characterised by a multiplicity of variants because they are applied in practice and also subject to further practical development. a) The Cost Comparison Statement A cost comparison is undertaken in order to facilitate a choice between several functionally similar assets. The intention is to adopt that project which has the lowest average periodic cost (comparison of alternatives). A cost comparison is also undertaken if it is necessary to decide whether an existing asset should be continued in use, or displaced, or replaced with a new asset (replacement problem). Such costs that are equal for all investment alternatives are not relevant from a decision-making standpoint and need not therefore be taken into account in a viability comparison. However, in practice, cost comparison statements include a complete cost comparison (because of the adoption of a

16 381 Capital Budgeting Techniques 382 standardised formula). In addition to the recurrent periodic operating costs (costs that are fixed or variable with respect to the level of activity), a cost comparison normally includes depreciation and interest on the capital tied up in the investment. Practical cost comparisons partly differentiate themselves by the way in which they take account of interest and capital consumption. Adopting the ''engineersformula"(rummel 1936), costs are computed in accordance with equation (13). If projects require different levels of capital expenditure, a profitability comparison is fundamentally not tenable. In such a case a rate of profit statement should be prepared, i.e. average capital employed (ROI method). ROI = (14) KB ROI - investment project's return on investment; G - average periodic profit; KB - average capital employed. Κ = K b + a ü ~ ^T + a ~*~ j (13) An investment project is profitable if its return on investment exceeds a predetermined minimum. = K b + (a 0 -l T ) (^ + i)+il T. Κ - periodic asset cost (monthly); K b - periodic asset operating costs (fixed and variable labour, energy, material and maintenance costs); a 0 - asset acquisition cost; 1 T - asset residual value at the end of its projected service life T; Τ - projected service life of asset; i - interest rate. Equation (13) includes fixed instalment accounting depreciation (a 0 l T )/T. The average invested capital on which interest is calculated is equal to l T + (a 0 \j)/2 = (a 0 + l T )/2. The expression (l/t+i/2) in (13) is occasionally described as a capital servicing factor. For values of 0 < i <0,1 and T>2 the capital servicing factor (l/t+i/2) approximates the value of the recovery or annuity factor i (1 + i) T /[(1 +i) T - 1] given by equation (6). In a comparison of alternatives of equal capability, the asset to be preferred is that which can be operated at the lowest average periodic cost. If asset capabilities are unequal, average periodic costs do not constitute a sensible measure for choosing between them. In the latter case a profit comparison should be undertaken. In certain circumstances a cost comparison is still possible. If the alternative with the higher outlays has a lower cost per unit of output, it is also the more profitable. Thus, the more viable investment project is that which results in the lowest average product unit cost. Accordingly, the solution to the replacement problem is that an existing asset should be substituted by a new asset when the average costs of the former exceed those of the latter. b) The Return on Investment Method If investment proposals not only differ with respect to periodic (or product unit) costs, but also (because of a dependence between product prices and the type of project implemented) with respect to revenue, a cost comparison should be extended to a profit comparison. For any given level of capital investment, that capital project should be preferred which generates the highest average annual profit. c) The Pay-Back Method The pay-back calculation (pay-off calculation, capital recovery calculation) determines the time-span required for the recovery of a project's acquisition cost from its sales revenue (net receipts). The acquisition cost recovery period is called the pay-back period: An investment is profitable if its pay-back period Τ does not exceed a predetermined maximum payback period T m a x. - A project is more profitable than an alternative if the pay-back period of the former is less than that of the latter, i.e. the former recovers its acquisition cost sooner. To determine the pay-back period T, the net receipts e t (t= 1, 2, 3...) are, commencing with period 1, added together until the resultant cumulative sum exactly covers the acquisition payment a 0. The period Τ in which the last net cash inflow needed for recovery of the acquisition payment a 0 is received, defines the project's pay-back period. T-l Σ e t <a () < Σ e t. t=l 1=1 τ (15) When a project's net receipts are constant (e t = e for t=l, 2,...), the pay-back period is determined by means of a simple averaging. The pay-back period is then defined either as the quotient T = a 0 /e or by the next highest integer. For e ( = e it follows from (15) that T - K ^ < T. (16) The pay-back period measures the profitability of an investment project solely by considering the time-span during which invested capital is recovered. The project's subsequent performance is ignored and, according to the pay-back criterion, long-term projects generally appear to be less profitable than those of a short-term character.

17 383 Capital Budgeting Techniques Supplementary Investment Measures a) Accounting for Taxes in Project Evaluation Tax payments must be allowed for in investment computations if they influence the investment decision. Taxes that are independent of profits (property tax, turnover tax) are allowed for in the payments stream, i.e. they reduce the periodic net receipts (-^Business Taxation). The inclusion of profit-related taxes (income tax, corporation tax) has long been debated because of the view that, as a rule, they have an equal scale effect on the cash flows of investment projects and are therefore irrelevant in profitability comparisons. The present position in the Capital Budgeting literature is that profit-related taxes should generally be taken into account in investment calculations but does not preclude the possibility that they may not influence decisions in individual cases. The prescriptions for dealing with profit-related taxes in an investment computation can be summarised in two categories: - The net methods treat profit-related tax as payments that reduce an investment's net receipts. - On the other hand, the gross methods allow for the profit-related taxes that are ascribable to an investment by modifying the discount rate. b) Allowing for Ν on-financial Objectives in Project Evaluations In practice it is frequently not possible solely to confine attention to the determination and evaluation of the effect of investment on profitability because other objectives are pursued which are not amenable to direct quantitative treatment in investment calculations. In such cases utility value computations can be prepared (Zangemeister 1976) to facilitate an investment project priority ranking. Utility value analysis is the analysis of a number of complex alternatives and is intended to order the elements of each alternative in a manner which corresponds to the preferences of the decision-maker by reference to a multidimensional objective function. This ranking is based on the utility values (total values) of the alternatives. To simplify the weighting of the different objectives it is helpful to summarise the criteria in groups in developing a two- or multistage hierarchy of criteria. Emmert (1974), for example, has - on the basis of an enquiry among firms - developed the criterion catalogue shown in Figure 2 for the evaluation of the nonfinancial effects of investment. Other authors make the distinction between economic, technical, legal and social valuation criteria (Olfert 1982). The gross methods are inexact and are only to be recommended in exceptional cases as approximation procedures. The literature therefore generally cautions against their use. The net methods make use of post-tax net receipts and may be classified according to whether, and how, they allow for the tax-deductibility of depreciation and interest payments on debt capital. Three particular models can be distinguished (Steiner 1980): - The basis model adopts the difference between net receipts and depreciation as the basis of taxable earnings and does not adjust the discount rate. - The standard model utilises the same earnings basis as the basis model but reduces the discount rate by the tax rate. - The interest model allows for interest payments in addition to depreciation in computing taxable earnings and, like the basis model, uses an unadjusted discount rate. Steiner (1980) has shown that the interest model contains the basis model and the standard model as special cases. Hence, profit taxes should be allowed for in an investment computation by deducting periodic depreciation and periodic interest payments from periodic net receipts. Criteria category End-product market criteria Labour and factor market criteria Physiological criteria Infrastructure criteria Technical criteria Environmental criteria Criteria Market share Degree of market saturation Product range Market strategy Advertising sensitivity Labour recruitability ' Raw material availability Service Delivery time Accident security Dust, noise, etc. Stress Physical strain Servicability Internal transport External transport Energy provision Prior and subsequent capacity Buisness region Removal of waste Universal applicability Capacity reverses Degree of automation Training requirements Maturity of construction Disruption to buisness on installation Consistency with official planning Environmental damage from emissions etc. Image improvement in den-product markets Image improvement in labour market Adjustment of the environment to investnent Satisfaction of socio-political requirements Figure 2: Criteria for the Evaluation of (he Non-Financial Effects of Investment

18 385 Capital Budgeting Techniques 386 If the different criteria are not of equal importance to the decision-maker, a weighting system is a necessary precondition to the ascertainment of the constituent utilities of investment projects by reference to that array of criteria. Finally, the summation of the weighted, or unweighted, constituent utilities gives the utility values of investment projects which can then be compared. A utility value analysis does not represent a closed decision-making computation but is an open decisionmaking framework that is intended to ensure the transparency of the decision and its implementability by reference to a subjectively determined weighting system and constituent utilities (Blohm/Lüder 1983). IV. Outlook Investment computational procedures have diverse qualitative features. They are characterised by an inverse relationship between their degrees of complexity and pretension on the one hand, and their level of abstraction and cost on the other (Kern 1976). The question of the optimal degree of complexity of the procedures that should be applied to particular investment decisions therefore suggests itself. Because this question can generally only be answered by reference to particular procedures or techniques, the choice of available investment computational procedures depends upon the investors' extremely subjective criteria. Finally it can be assumed that there is a trend toward the procedures of Financial mathematics which is being reinforced by the growth in electronic data processing installations in the area of business planning ( + A DP-Application Systems). Bibliography a) Introductory Reading Albach, Horst (1959): Wirtschaftlichkeitsrechnung bei unsicheren Erwartungen. Köln/Opladen (Westdeutscher Verlag). Boulding, Kenneth Ε. (1934/1935): The Theory of a Single Investment. In: Quarterly Journal of Economics, 49: Kern, Werner (1976): Grundzüge der Investitionsrechnung. Stuttgart (Poeschel). Lohmann, Karl (1978): Finanzmathematische Wertpapieranalyse. Göttingen (Schwartz). Olfert, Klaus (1982): Investition. 2nd ed., Ludwigshafen (Kiehl). Schmidt. Reinhard H. (1986): Grundzüge der Investitionsund Finanzierungstheorie. 2nd ed., Wiesbaden (Gabler). Schneider, Erich (1951): Wirtschaftlichkeitsrechnung. 1st ed., Bern/Tübingen (Francke/Mohr). Swoboda, Peter (19&6): Investition und Finanzierung. 3rd ed., Göttingen (Vandenhoeck & Ruprecht). ter Horst. Klaus W. (1980): Investitionsplanung. Stuttgart et al. (Kohlhammer). b) Further Reading Albach. Horst (1962): Investition und Liquidität. Wiesbaden (Gabler). Albach. Horst (ed.) (1975): Investitionstheorie. Köln (Kiepenheuer & Witsch). Blohm. Hans/Lüder, Klaus(1983): Investition. 5th ed., München (Vahlen). Dinkelbach, Werner (1982): Entscheidungstheoretische Aspekte zur Beurteilung voneinander unabhängiger Investitionsobjekte. In: Koch. H. (ed.): Neuere Entwicklungen in der Unternehmenstheorie. Wiesbaden (Gabler), Emmert, Peter H. (1974): Die Planung und Beurteilung von Investitionsvorhaben in einem Mensch-Maschine-Kommunikationssystem. Diss. Erlangen-Nürnberg. Engels, Wolfram (1962): Betriebswirtschaftliche Bewertungslehre im Lichte der Entscheidungstheorie. Köln/Opladen (Westdeutscher Verlag). Georgi, Andreas A. (1986): Steuern in der Investitionsplanung. Hamburg (Steuer- und Wirtschaftsverlag). Hax, Herbert (1964): Investitions- und Finanzplanung mit Hilfe der linearen Programmierung. In: Zeitschrift für betriebswirtschaftliche Forschung, 16: Hax, Herbert (1979): Investitionstheorie. 4th ed., Würzburg/ Wien (Physica). Jacob, Herbert (1964): Neuere Entwicklungen in der Investitionsrechnung. In: Zeitschrift für Betriebswirtschaft, 34: , Kern, Werner (1974): Investitionsrechnung. Stuttgart (Poeschel). Kraschwitz. Lutz (1987): Investitionsrechnung. 3rd ed., Berlin/New York (de Gruyter). Liebich. Burkhardt (1986): Investitionsrechnung. Frankfurt a. M./Bem/New York (Lang). Lüder, Klaus (ed.) (1977): Investitionsplanung. München (Vahlen). Moxter, Adolj (1966): Zur Bestimmung der optimalen Nutzungsdauer von Anlagegenständen. In: Moxter, A./Schneider. D./Wittmann, W. (eds.): Produktionstheorie und Produktionsplanung. Köln/Opladen (Westdeutscher Verlag), Picot. Arnold (197'6): Freiwillige Beteiligung externer Gruppen als Konsensbildungsinstrument für Unternehmungsentscheidungen. In: Die Unternehmung, 30: Rudolph, Bernd(1986): Klassische Kapitalkostenkonzepte zur Bestimmung des Kalkulationskostenzinsfußes für die Investitionsrechnung. In: Zeitschrift für betriebswirtschaftliche Forschung, 38: Rudolph, Bernd (1986): Neuere Kapitalkostenkonzepte für die Investitionsrechnung. In: Zeitschrift für betriebswirtschaftliche Forschung, 38: Rückle, Dieter (1983): Betriebliche Investitionen. In: Die Betriebswirtschaft, 43: Rummel, Kurt (1936): Wirtschaftlichkeitsrechnung. In: Archiv für das Eisenhüttenwesen, 10: Schneider, Dieter (1980): Investition und Finanzierung. 5th ed., Wiesbaden (Gabler). Schneider, Dieter (1981): Geschichte der betriebswirtschaftlichen Theorie. München (Oldenbourg). Schulte, Karl-Werner (1978): Wirtschaftlichkeitsrechnung. Würzburg/Wien (Physica). Seelbach, Horst (1984): Ersatztheorie. In: Zeitschrift für Betriebswirtschaft, 54: Steiner. Jürgen (\9S0): Gewinnsteuern in Partialmodellen für Investitionsentscheidungen. Berlin (Schmidt). Zangemeister, Christof (1973): Nutzwertanalyse in der Systemtechnik. 3rd ed., München (Lexika).