Research Of Capital Budgeting Approach Based On Competitive Factors In Different Market Environments

Investment activities of firms interact with the market environment, in which the firms are operating. Competitions among firms are different in different market environments. Ignoring competitive factors in the market environment can lead to incorrect investment decisions, and sometimes it may endanger the firms' existence. Therefore, considering various competitive factors in different market environments, differential evaluation methods should be developed for capital budgeting.Although many improved capital budgeting techniques, including real option approach and game theory, have been put forward to consider the influences of uncertain competitive environments, they lack thorough analysis of the interactions between investment and market environment, and different characteristics of investment decision in different market environments. Consequently competitive factors haven't been fully taken into account in current capital budgeting techniques.After reviewing the current state of investment decision methods, this thesis proceeds to contribute as follows. Firstly, by applying relevant theories in microeconomics, industrial organization and competitive strategy, it analyzes the interactions between investment and market environment. Accordingly it puts forward several items that should be considered in capital budgeting. Then by applying probability theory, binomial tree method and game theory, it develops capital budgeting models under perfect competition and oligopoly.This thesis shows that under perfect competition and monopolistic competition many firms share the same investment opportunities. When enough competitors enter, the market comes into equilibrium and the cash inflows obtained by the investors will be equal to the opportunity cost of capital. So the investors should evaluate the influence of competitive entry on the opportunity value of the investment projects incapital budgeting.In oligopoly, the investment opportunities and profits may be shared among all oligarchs. The market power of each firm and the strategic interactions between the oligarchs will determine the competition structure and each investor's profits in equilibrium. In order to get optimal investment strategies, firms should apply game theory to consider the strategic influences by competitors.Under monopoly, the monopoly company generally has proprietary right over investment opportunities. It may only use real option approach so as to make correct investment decisions.Liu Ruijie (Finance and Accounting) Directed by: Prof. Shao Ruiqing...