Capital budgeting in practice – A case study of a Finnish retail company

Abstract

Capital budgeting is a crucial part of management accounting, guiding firms in evaluating long-term investments and allocating resources effectively. While advanced tools for evaluating strategic investments exist, Alkaraan and Northcott (2006) show that firms continue to favor traditional methods such as Net Present Value (NPV) and Internal rate of return (IRR). Emergent techniques such as real options and balanced scorecard remain underused, pointing to a clear gap between theory and practice.

This thesis examines how capital budgeting methods are applied in a large Finnish retail company and compares the findings with insights from academic literature. The thesis uses Alkaraan & Northcott (2006) as a theoretical framework, focusing particularly on the similarities and differences in the treatment of strategic versus non-strategic investments.

The findings show a strong reliance on traditional discounted cash flow techniques, especially NPV, across both strategic and non-strategic investments. Strategic tools such as real options or the balanced scorecard were not used at the operational level, and discount rates were standardized rather than project specific.