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Capital budgeting using residual income maximization

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Abstract

This analysis provides theoretical support for the use of residual income. Economic theory states that capital investment should maximize the present value of incremental cash flow. When a firm is decentralized, coordinating the necessary information to determine optimal investment in the short run may be impossible. But the residual income maximizing choice can be coordinated using a simple transfer-pricing system. Under appropriate capitalization and depreciation policies, the residual-income maximization policy leads the firm to make suboptimal short-run investment decisions, yet these decisions still lead the firm to its long-run, presentvalue-maximizing capacity level.

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Authors and Affiliations

  1. Haas School of Business, University of California, 487 Faculty Building #1900, 94720-1900, Berkeley, California

    Regina M. Anctil

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  1. Regina M. Anctil
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Funding for this study was provided by grants from the Arthur Andersen & Co. Foundation and the National Science Foundation.

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Anctil, R.M. Capital budgeting using residual income maximization. Rev Acc Stud 1, 9–34 (1996). https://doi.org/10.1007/BF00565410

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  • DOI: https://doi.org/10.1007/BF00565410

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