¹ Chandler, Alfred D., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), 445.Google Scholar

² The present value concept that will be discussed in this article may be defined by the equation:

V = Σ_tX_t(l + r)^−t

where

X_t = cash flow in period t (including initial capital outlay)

r = discount rate

t = number of years or periods

V = present value

³ Chandler, Alfred D. Jr, Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, Mass., 1962)Google Scholar; Chandler, , “The Emergence of Managerial Capitalism,” Business History Review 58 (Winter 1984): 473–503.CrossRefGoogle Scholar

⁴ For research on related topics, see Dutton, John M., Thomas, Annie, and Butler, John E., “The History of Progress Functions as a Managerial Technology,” Business History Review 58 (Summer 1984): 204–33CrossRefGoogle Scholar; and Paul Uselding, “Business History and the History of Technology,” ibid. 54 (Winter 1980): 443–52.

⁵ Wellington, Arthur M., The Economic Theory of the Location of Railways (New York, 1877), 193–97, quotation on 194.Google Scholar

⁶ Ibid., 196.

⁷ Ibid., 192–95.

⁸ Ibid., 2d ed. (1887).

⁹ Ibid., 7.

¹⁰ Burns, Clifton S., “Valuation of Public Utilities,” Municipal Journal and Engineer 29 (30 Nov. 1919): 744–46Google Scholar; Finlay, James R., The Cost of Mining (New York, 1909)Google Scholar; Schmidt, F. Sommer, “The Present Value of a Mine,” Mining and Scientific Press, 5 Feb. 1916, 207–8.Google Scholar

¹¹ Finlay, The Cost of Mining, 2.

¹² Pennell, Walter O., “Present Worth Calculations in Engineering Studies,” Journal of the Association of Engineering Societies 53 (Sept. 1914): 112–45.Google Scholar

¹³ The early development of return on investment criteria used by the Du Pont Company is well documented in Chandler, Alfred D. Jr, and Salsbury, Stephen, Pierre S. du Pont and the Making of the Modern Corporation (New York, 1971), 123–226Google Scholar; Chandler, The Visible Hand, 439–50; Johnson, H. Thomas, “Management Accounting in an Early Integrated Industrial: E. I. du Pont de Nemours Powder Company, 1903–1912,” Business History Review 49 (Summer 1975): 184–204CrossRefGoogle Scholar; Johnson, H. Thomas and Kaplan, Robert S., Relevance Lost: The Rise and Fall of Management Accounting (Boston, 1987) 61–92.Google Scholar

¹⁴ Chandler and Salsbury, Pierre du Pont, 137–47.

¹⁵ Johnson and Kaplan, Relevance Lost, chap. 4.

¹⁶ The development and implementation of return on investment criteria by Donald son Brown at General Motors is documented in Johnson, H. Thomas, “Management Accounting in an Early Multidivisional Organization: GM in the 1920s,” Business History Review 52 (Winter 1977): 490–517CrossRefGoogle Scholar; Brown, Donaldson, “Pricing Policy in Relation to Financial Control,” Management and Administration 7 (Feb. 1924): 195–98Google Scholar; Johnson and Kaplan, Relevance Lost, 93–123.

¹⁷ Brown, “Pricing Policy,” 197.

¹⁸ Johnson and Kaplan, Relevance Lost, chap. 5.

¹⁹ Bradley, Albert, “Setting Up a Forecasting Program,” American Management Association Annual Convention Series 41 (1926): 20.Google Scholar

²⁰ Lesser, Arthur Jr, “Engineering Economy in the United States in Retrospect—An Analysis,” Engineering Economist 14 (Winter 1969): 109.CrossRefGoogle Scholar

²¹ Fish, J. C. L., Engineering Economics: First Principles (New York, 1915).Google Scholar

²² Eugene Grant, telephone interview with author, 17 Oct. 1984.

²³ Fish, Engineering Economics: First Principles, 118–47.

²⁴ Ibid., 2d ed. (1923), quotation on 5.

²⁵ Ibid., 41, 298.

²⁶ Grant, Eugene L., Principles of Engineering Economy (New York, 1930).Google Scholar

²⁷ Ibid., 355.

²⁸ Chandler, Strategy and Structure; Uselding, “Business History and the History of Technology,” 443–52.

²⁹ Public utility regulatory requirements did not affect the utilization and diffusion of modern capital budgeting practices. The use of AT&T's present worth methods was not discussed during the House of Representatives investigation of the telephone industry, according to the transcripts in U.S. Congress, House, Investigation of the Telephone Industry in the United States, 76th Cong., 1st Sess., 1939, H. Doc. 340. I did not find references to dis counted cash flow concepts in the literature on the history of public utility regulation prior to the Second World War. References to the economic history of public utility regulation include Bonbright, James C., Principles of Public Utility Rates (New York, 1961)Google Scholar; and Phillips, Charles F. Jr, The Economics of Regulation: Theory and Practice in the Transportation and Public Utility Industries (Homewood, Ill., 1969).Google Scholar

³⁰ Charlesworth, H. P., “General Engineering Problems of the Bell System,” Bell System Technical Journal 4 (Oct. 1925): 516–19.CrossRefGoogle Scholar

³¹ Investigation of the Telephone Industry in the United Staus, 193–94.

³² Fundamental plans were described in Rhodes, F. L., “Engineering Cost Studies,” Bell System Technical Journal 4 (Jan. 1925): 1–14CrossRefGoogle Scholar; Rice, D. M., “Fundamental Plan Work as Related to Building and Equipment Matters,” paper read at the Bell System Building and Equipment Conference, New York, December 1925Google Scholar; D. M. Rice, “Application of Fundamental Plans,” paper read at the Plant and Engineering Conference of the Bell System, Shawnee On Delaware, May 1923. Provisional estimates were described in R. H. Burcher, “Provisional Estimate Practices,” paper read at the Conference to Discuss Economy and Efficiency in Operation, Shawnee On Delaware, 1922; “A Text of General Information for Employees of the Long Lines Department” (American Telephone and Telegraph Company, 1929), 129–30.

Commercial surveys were described in Charlesworth, “General Engineering Problems of the Bell System,” 515–41; and Rice, “Applications of Fundamental Plans.” Engineering cost studies were described in Rhodes, “Engineering Cost Studies,” 1–14; E. N. Renshaw, “Comparative Cost Studies and Estimates,” The Bell System Building and Equipment Conference, Dec. 1925, section 7.

³³ “Annual Report—Engineering Department,” American Telephone and Telegraph Co. (1906), 6–7.

³⁴ Rice, “Application of Fundamental Plans,” 546.

³⁵ Charlesworth, “General Engineering Problems of the Bell System,” 515–41; Rhodes, “Engineering Cost Studies,” 1–14; Rhodes, , “Engineering Cost Studies,” Telegraph and Telephone Age 15 (1 Aug. 1926): 339–44.Google Scholar

³⁶ Rhodes, “Engineering Cost Studies,” 1 Aug. 1926, 341.

³⁷ Engineering Economy, AT&T Co., Department of Operations and Engineering (1952).

³⁸ J. C. Gregory, letter to author, 10 May 1984.

³⁹ Ibid., confirmed in letter to author, 22 March 1984 from Claude O. Goldsmith, senior vice-president of finance at Atlantic Richfield.

⁴⁰ Gregory's tables were based on Naperian logarithms:

where

X_t = cash flow in period

r = discount rate

t = number of years or periods

V = present value

e = base of Naperian logarithms

See J. C. Gregory, “Interest Rate Tables for Determining Rate of Return on Profit Projects,” Atlantic Refining Co., internal document, 1946.

⁴¹ Hill, Horace G., A New Method of Computing Bate of Return on Capital Expenditures (Berwyn, Pa., 1953), quotation on 20.Google Scholar

⁴² William McEachron, letter to author, 6 April 1983.

⁴³ James Weaver, letters to author, 11 Nov. 1983 and 15 Feb. 1984. Atlas Powder originated as one of two Du Pont operations (Hercules Powder was the second) divested in 1912 under a federal antitrust agreement.

⁴⁴ Weaver, James B., “Use of Engineering Economics by the Chemical Industry,” Engineering Economist, Fall 1956, 19–25CrossRefGoogle Scholar; Weaver, James and Reilly, Robert, “Interest Rate of Return for Capital Expenditure Evaluation,” Chemical Engineering Progress, Oct. 1956, 405–12.Google Scholar

⁴⁵ Weaver, “Use of Engineering Economics by the Chemical Industry,” 22.

⁴⁶ Terborgh, George, Dynamic Equipment Policy (New York, 1949).Google Scholar

⁴⁷ Robert Kaplan used arguments that were similar to Terborgh's in his article on justifying the acquisition of computer-integrated manufacturing (CIM) equipment; he advised managers to focus on their ability to estimate the costs and benefits of CIM. See Kaplan, Robert S., “Must CIM Be Justified by Faith Alone?” Harvard Business Seview 64 (March-April 1986): 87–95.Google Scholar

⁴⁸ Terborgh, Dynamic Equipment Policy, chaps. 6 and 7.

⁴⁹ Lutz, Friedrich and Lutz, Vera, The Theory of Investment of the Firm (New York, 1951).Google Scholar

Their formula is:

r = instantaneous rate of interest

Q(t) = rent on equipment at period t

S = scrap value

T = date equipment will be scrapped

Present Value

⁵⁰ Ibid., chap. 2.

⁵¹ Lorie, James H. and Savage, Leonard J., “Three Problems in Rationing Capital,” Journal of Business 28 (Oct. 1955): 229–39.CrossRefGoogle Scholar The internal rate of return method is applied to capital budgeting problems as follows:

X_t = cash flow of period t

i = time value of money to the firm

r = internal rate of return (IRR)

n = life of investment

solve for r in order to calculate the IRR

⁵² Bierman, Harold and Schmidt, Seymour, The Capital Budgeting Decision, 6th ed. (New York, 1984)Google Scholar; chap. 3 compares the IRR and NPV methods.

⁵³ Dean, Joel, Capital Budgeting (New York, 1951).Google Scholar

⁵⁴ Ibid., 17.

⁵⁵ Gordon Shillinglaw, professor at Columbia University, Graduate School of Business, interview with author, December 1983. Confirmed in letter to author from John M. Schultz, 10 May 1984. Schultz worked for Horace Hill at Atlantic Refining and was promoted to controller of Atlantic's chemical subsidiary in 1966; he later became controller of the Alaskan pipeline project.

⁵⁶ Hill, A New Method of Computing Bate of Return on Capital Expenditures; Dean, Joel, “Controls for Capital Expenditures,” AMA Financial Series (New York, 1953): 3–13Google Scholar; Gordon Shillinglaw, “Measuring the Investment Worth of Capital Projects,” ibid., 14–23; Hill, “Projecting Future Effects of Capital Expenditures,” ibid., 31–36; Dean, Joel, “Measuring the Productivity of Capital,” Harvard Business Review 32 (Jan.-Feb. 1954): 120–30Google Scholar; Dean, , “Has MAPI a Place in a Comprehensive System of Capital Controls?” Journal of Business 28 (Oct. 1955): 261–74CrossRefGoogle Scholar; Shillinglaw, “Residual Values in Investment Analysis,” ibid., 275–84.

⁵⁷ Anthony, Robert N., Shoe Machinery: Buy or Lease?, rev. ed. (New York, 1955).Google Scholar

⁵⁸ Ibid., 13.

⁵⁹ Anthony, Robert N., Management Accounting: Text and Cases (Homewood, Ill., 1956), chaps. 17 and 18.Google Scholar

⁶⁰ Christenson, Charles, “Construction of Present Value Tables for Use in Evaluating Capital Investment Opportunities,” Accounting Review 30 (Oct. 1955): 666–72.Google Scholar

⁶¹ United States vs. United Shoe Machinery Company, 222 Fed. Rep. 350, 12n, 56, 56n; United States vs. United Shoe Machinery Company, 234 Fed Rep. 127, lOn, lln., U.S. vs. USMC 110 F. Supp. 295, 301, 301n.

⁶² “Sales Prices for Outstanding Shoe Machinery: A Basis for Negotiation,” Andrews, Anthony, and McLean, internal document, May 1955; “Determination of Customer Equivalent Optional Sale Prices for Machines Outstanding on Form B Leases,” Joel Dean Associates, internal document, April 1956.

⁶³ Dutton, Thomas, and Butler, “The History of Progress Functions as a Managerial Technology,” 204–33.

⁶⁴ Dutton, Thomas, and Butler concluded that social costs can be incurred when applied studies and management practices diverge from theoretical research and empirical studies. Robert S. Kaplan emphasized the importance of cooperation between researchers and industrial managers in the development and adoption of innovative management accounting practices. See Dutton, Thomas, and Butler, “The History of Progress Functions as a Managerial Technology,” 204–33; and Kaplan, Robert S., “The Evolution of Management Accounting,” Accounting review (July 1984): 390–418Google Scholar; Johnson and Kaplan, Relevance Lost, 253–63.

⁶⁵ Some recent publications on capital budgeting challenges and innovations include Brealey, Richard A. and Myers, Stewart C., Principles of Corporate Finance, 2d ed. (New York, 1984), chap. 34Google Scholar; Hendricks, James A., “Cost Accounting for Factory Automation,” Management Accounting, Dec. 1988, 24–30Google Scholar; Kaplan, “Must CIM Be Justified by Faith Alone?“

⁶⁶ Hendricks, “Cost Accounting for Factory Automation,” 25.