Technical Note: Defining Project Scale

Scale is a fundamental consideration when evaluating and ranking capital investment projects. Beaves [2, 3], Lin [6], and Shull [7] have noted that the definition of “project scale” is key to the definition of “modified” or “overall” rates of return earned by projects. This article demonstrates that the impact of how project scale is defined extends beyond the calculation of rate of return decision criteria. Given its importance to the capital budgeting process, it is somewhat surprising that project scale has not been clearly and consistently defined. The purpose of this article is to raise awareness of the need for a uniform definition of project scale. Although three potential measures of project scale are compared, this article does not provide a mathematical proof that one of these definitions is correct and the others are not. Nonetheless, a strong argument is made for a particular measure of project scale as well as for the importance of having a single, uniform definition of that concept.

BIOGRAPHICAL SKETCHES

Robert G. Beaves is a professor of finance at Robert Morris University in Pittsburgh, Pennsylvania. He earned his Ph.D. in finance and a law degree at the University of Iowa and has written articles on capital budgeting topics in this and other academic journals.

Richard W. Stolz is dean of the School of Business Administration and Economics at the University of South Carolina Upstate, Spartanburg, South Carolina. He earned his Ph.D. in economics at Michigan State University. His prior research and writing has focused on capital markets, management of financial institutions, and financial management.