Journal of Financial and Strategic Decisions Volume 11 Number 2 Fall 1998 61 THE MANAGERIAL IMPERATIVE OF EVALUATING NON-CAPITAL EXPENDITURES WITHIN A CAPITAL BUDGETING CONTEXT John B. White * and Morgan P. Miles * Abstract It has long been an accepted precept that the purpose of management is the maximization of shareholder wealth. Few would dispute the notion that projects requiring long-term capital investments should be subjected to capital budgeting. Numerous authors have, however, questioned the appropriateness of subjecting non-capital expenditures, such as advertising, research or product development, to capital budgeting analysis. These studies have suggested that it is inappropriate to evaluate expenditures with uncertain outcomes, such as advertising, research and product development, with a technique as rigorous as net present value. The present study contends that it is not only appropriate to evaluate non-capital expenditures using capital budgeting techniques but it is essential for firm survival. Furthermore, despite difficulty in applying capital budgeting to advertising or R&D expenditures, no other analytical technique is superior to capital budgeting in determining the effect of expenditures on the financial performance of the firm. INTRODUCTION Owners are primarily interested in the wealth creation ability of an enterprise, and they typically evaluate their investments by the value of the investment’s financial return. Owners tend to prefer that all long-term corporate decisions to be evaluated based on the investment’s contribution to the maximization of shareholder wealth. Dean (1994) suggests that “the master goal of the modern corporation . . . should be to maximize the present worth at the corporation’s cost of capital of the future stream of benefits to the stockholder. All other objectives ... should be either intermediate or subsidiary to this overriding corporate objective.” (Emphasis added.) Shareholder interest groups are becoming more vocal and are making more rigorous performance demands upon management. In an era of corporate takeovers, it is incumbent upon managers to place performance demands upon themselves in order to survive. Decisions include what new products are to be introduced as well as incremental decisions concerning what products and markets should be expanded or contracted. When faced with scores of competing projects that effect the value of the firm, managers need an objective technique to sort through the often impassioned arguments. The tool that best assesses a proposed corporate investment’s effect on shareholder wealth is capital budgeting, and more specifically net present value (NPV) analysis (Brigham 1995). One type of investment activity that appears to be evaluated, at least implicitly, in this manner is R&D expenditures, specifically new product development investments. Chauvin and Hirschey (1993) in an empirical analysis of 1988-1990 COMPUSTAT firms found that R&D expenditures (or product development expenditures) were a highly significant variable in a firm’s market value. This suggests that expenditures on product development are perceived by shareholders to significantly increase the market value of the firm. In the past marketers have suggested utilizing capital budgeting in the assessments of marketing decisions, including: 1) advertising; 2) distribution; and 3) product strategy decisions (Kirplani and Shapiro 1973; White and Miles 1996). Devinney, Stewart, and Shocker (1985) even suggest that “one of the strengths of marketing is its readiness to borrow concepts and theories from other disciplines.” However, there is a stream of research that questions the validity of capital budgeting in business decision making. Gold (1976) is critical of capital budgeting because of the assumption that “it is possible to forecast the time *Georgia Southern University