Capital Budgeting in a Multidivisional Firm

Anil Arya (), Jonathan Glover and Richard A. Young

Corporate Finance & Organizations from Ohio State University

Abstract: The purpose of this paper is to study capital budgeting in a setting where emphasis is on control over project selection. We construct a model of a multidivisional firm in which there are no constraints on investment and all projects have a positive net present value. Nevertheless, we show that it is optimal for the center to use relative project ranking in determining which projects are to be funded.

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