Question

How would an organization, incorporate the effect of culture in capital budgeting decisions, you can consider the type of investments to be undertaken as well as the threshold of acceptance. if at all possible?

Answer 1

The culture of the organization can be incorporated in the discount rate that is used in the capital budgeting decisions like net present value.

For example if the culture of the organization is to complete work on time and give accurate results, the the organization can use a lower risk premium for the calculation of the discount rate. So, we can say 2% (risk free rate)+ 3% ( Risk premium) = 5%. Therefore, the discount rate used for capital budgeting decision can be 5%

On the other hand, if the culture of the organization is to complete work slowly and exceed timelines and give inaccurate results, the the organization can use a higher risk premium for the calculation of the discount rate. So, we can say 2% (risk free rate)+ 6% ( Risk premium) = 8%. Therefore, the discount rate used for capital budgeting decision can be 8%