Capital budgeting practices: evidence from Sri Lanka

2015 ◽  
Vol 12 (1) ◽  
pp. 55-82 ◽  
Author(s):  
Mohamed Nurullah ◽  
Lingesiya Kengatharan
Keyword(s):  
Sensitivity Analysis ◽  
Sri Lanka ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Chief Financial Officers ◽  
Sri Lankan ◽  
Content Type

Purpose – The purpose of this paper is to investigate prevailing capital budgeting practices in Sri Lankan listed companies. Design/methodology/approach – A comprehensive primary survey was conducted of 32 out of 46 chief financial officers (CFOs) of manufacturing and trading companies listed on the Colombo Stock Exchange in Sri Lanka. Garnered data were then analyzed using appropriate statistical techniques. Findings – The results revealed that net present value (NPV) was the most preferred capital budgeting method, followed closely by payback (PB) and internal rate of return (IRR). Similarly, sensitivity analysis was regarded as the dominant capital budgeting tool for incorporating risk and the widely used method for calculating cost of capital was the weighted average cost of capital. Moreover, results revealed that size of the capital budget affects the use of the capital budgeting methods (NPV, IRR and PB) and incorporating risk tool (sensitivity analysis and simulation). Further, results revealed that CFOs had higher educational qualification were preferred to use sophisticated capital budgeting practices dominantly NPV, IRR and incorporating risk tool of sensitivity analysis although they were found to be reluctant in use of accounting rate of return. In a similar vein CFOs with higher experience were preferred using IRR and sensitivity analysis. Originality/value – This study contributed to academics, practitioners, policy makers and stakeholders of the company. Moreover, this research has proffered a more reliable and comprehensive analysis of capital budgeting practices in Sri Lankan listed manufacturing and trading firms. Since Sri Lanka is an unexplored country on capital budgeting practices, this research was originally contributed to the extant literature per se.

scholarly journals A study on capital budgeting practices of some selected companies in Bangladesh

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Md. Anhar Sharif Mollah ◽  
Md. Abdur Rouf ◽  
S.M. Sohel Rana
Keyword(s):  
Net Present Value ◽  
Cost Of Capital ◽  
Stock Exchange ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Chief Financial Officers ◽  
Content Type ◽  
Investment Projects ◽  
Body Of Knowledge ◽  
Wise Decision

Purpose The purpose of this paper is to investigate the current capital budgeting practices in Bangladeshi listed companies and provide a normative framework (guidelines) for practitioners. Design/methodology/approach Data were collected with a structured questionnaire survey taking from the chief financial officers (CFOs) of companies listed in the Dhaka Stock Exchange in Bangladesh. Garnered data were then analyzed using descriptive and inferential statistical techniques. Findings The results found that net present value was the most prevalent capital budgeting method, followed closely by internal rate of return and payback period. Similarly, the weighted average cost of capital was found to be the widely used method for calculating cost of capital. Further, results also revealed that CFOs adjust their risk factor using discount rate. Originality/value The findings of this study might help the firms, policymakers and practitioners to take a wise decision while evaluating investment projects. Additionally, this study’s findings enrich the existing body of knowledge in the field of capital budgeting practices by providing more reliable and comprehensive analysis taking samples from a developing economy.

Financial impact of high land prices on the viability of winery startup projects

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Michael Santos ◽  
Vincent Richman ◽  
Aidong Hu
Keyword(s):  
Net Present Value ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Investment Horizon ◽  
Internal Rate Of Return ◽  
Content Type ◽  
Land Prices ◽  
Practical Implications

Purpose Does it make economic sense to invest in winery startups with high land prices? This paper aims to apply a capital budgeting analysis for a startup project to investigate the role of land prices in the decision-making of a wine entrepreneur. Design/methodology/approach This paper uses a capital budgeting analysis to evaluate the value of a winery project using the six investment criteria: net present value (NPV), internal rate of return (IRR), modified IRR, profitability index, payback period (PB) and discounted PB. Findings This study finds that high land prices are economically justifiable (NPV is greater or equal to zero) when the weighted average capital cost is sufficiently low for investors who are able to diversify risks and with access to a cheap source of funds. Additionally, this study demonstrates that wine entrepreneurs need a long-term investment horizon because the recovery of the initial investment in winery startup projects takes many years. Research limitations/implications The startup winery projects are heavily influenced by wine pricing, production and cost assumptions. As a result, different assumptions made at other wine regions may result in slightly different outcomes for the acceptability of the wine startup projects. Practical implications High land prices are economically justified for investors and entrepreneurs with the ability to diversify risk and access to cheap financial resources. As such, land prices can be a critical obstacle for individual entrepreneurs who experience a lack of capital. Social implications In the famous wine regions of the world, high land prices may result in more wineries being owned by the capital rich wine conglomerates. Originality/value This paper provides estimations of land prices based on financial methods to discuss the justification of observed prices and the implications regarding the ability of investors and entrepreneurs to access capital.

scholarly journals ANALYZE REFRIGERATOR TOOLING INVESTMENT LIVIA MODEL AT PT LG ELECTRONICS INDONESIA

2008 ◽  
Vol 1 (1) ◽  
pp. 1-24
Author(s):  
Apit Supriyadi ◽  
Mini Wijaya ◽  
Tedy Fardiansyah
Keyword(s):  
Sensitivity Analysis ◽  
Net Present Value ◽  
Current Method ◽  
Capital Budgeting ◽  
Rate Of Return ◽  
Primary Methods ◽  
Capital Budget ◽  
Strategic Direction ◽  
Long Run ◽  
The One

For a large firm like PT LG Electronics Indonesia (LGEIN), which has resulted in high manufacturing utilization, require a few percent reductions in component prices every year. The one of potential project for cost reduction is tooling investment. After Livia is produced and the expenditure of new tooling is made, it is continually faced with the problem that current method computing profits are conventional without considering the expenditure of tooling in the long run. Finally, a firm’s capital budgeting decisions is needed because it defines its strategic direction. Four primary methods in the capital budget to decide whether or not the project should be accepted are: discounted payback, net present value, internal rate of return and profitability index. In addition, we use sensitivity analysis to indicate which factor has significant interfere with the project. The results generated that discounted payback is just 2 year 6 months less life of the project for 3 years, NPV generated positive result $3,502,387, and an IRR of this project is 25% greater than required rate of return 10% and profitability index gets 1.8 greater than 1. In sensitivity analysis shows that the project’s NPV is very sensitive to changes in sales and COGS, and relatively insensitive to changes in either growth rate or rate of return.In a method of capital budgeting analysis, Livia project could be accepted with initial investment for $4,199,288 and still more detailed analysis is required to support the expenditure.

A New Approach to Capital Budgeting in Closely-Held Firms and Small Firms

1981 ◽  
Vol 5 (4) ◽  
pp. 30-35 ◽  
Author(s):  
Thomas H. McInish ◽  
Ronald J. Kudla
Keyword(s):  
Small Firms ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Separation Principle ◽  
Discount Rates ◽  
Present Value ◽  
Investor Returns

The traditional application of the net present value method in capital budgeting involves the use of market derived discount rates such as the cost of capital. Justification of these discount rates stems from the separation principle that states that investment decisions can be made independent of shareholders' tastes and preferences. The purpose of this paper is to show that the separation principle does not hold for closely-held firms and small firms, and, accordingly, market-derived discount rates are inappropriate. Two capital budgeting techniques which are appropriate for these firms are presented. Accept/reject decisions for capital budgeting projects are often made using a technique known as “net present value” (NPV).1 Using the NPV method, acceptable projects are those for which the project's cost is less than the present value of the project's cash flows discounted at the firm's cost of capital; in other words, acceptable projects have a positive NPV. The firm's cost of capital is usually taken to be the weighted average of the firm's cost of equity and debt as measured by investor returns in the capital markets. Justification for use of a discount rate, determined by reference to market-wide investor returns, is based on “the separation principle” which asserts that corporations can make capital budgeting decisions independently of their shareholders' views.2 But because a critical assumption of the separation principle is that shares are readily marketable, it is likely that the separation principle and, hence, market-determined discount rates are inappropriate for closely-held firms and small firms.3 In this paper, we discuss two capital budgeting approaches which are applicable to firms whose shares are not readily marketable. This paper is divided into five sections. First, we discuss the traditional net present value approach to capital budgeting and, then, we indicate in detail, why it may not be suitable for use by closely-held firms and small firms. In the third and fourth sections, we explain two capital budgeting techniques which may be appropriate for use by these firms. Finally, we summarize our conclusions.

Corporate finance practices in Morocco

2017 ◽  
Vol 43 (8) ◽  
pp. 865-880 ◽  
Author(s):  
H. Kent Baker ◽  
Imad Jabbouri ◽  
Chaimae Dyaz
Keyword(s):  
Corporate Finance ◽  
Response Bias ◽  
Cost Of Capital ◽  
Capital Budgeting ◽  
Listed Companies ◽  
Rate Of Return ◽  
Allocation Of Resources ◽  
Content Type ◽  
Corporate Managers ◽  
The Cost

Purpose The purpose of this paper is to examine corporate finance practices in the frontier market of Morocco and compare the practices used by Moroccan companies to those in other countries. It focuses primarily on capital budgeting and real options. The study also examines whether corporate finance practices used in Morocco are consistent with more theoretically superior techniques. Design/methodology/approach The study uses a mail questionnaire to gather data from chief financial officers and other senior executives of Casablanca Stock Exchange (CSE) listed companies. Findings Moroccan managers generally view the internal rate of return, accounting rate of return, and payback method as more important than the theoretically superior net present value. Few of the responding firms use real options when making capital budgeting decisions. They tend to use less sophisticated techniques to evaluate investment opportunities and calculate the cost of capital than their counterparts in developed countries. The most frequently used techniques by CSE-listed companies to estimate the cost of equity capital are the cost of debt plus an equity risk premium and the accounting return on equity. CSE-listed companies rely heavily on management’s subjective judgment to estimate cash flows. Research limitations/implications Despite a 40 percent response rate, the number of responses did not permit examining whether differences in firm size, industry, educational background, and other characteristics affect the results. Although non-response bias is a potential limitation, test results show no statistically significant differences between the responding and non-responding companies on any of the five characteristics analyzed. These findings lessen concern about potential non-response bias. Given that the findings relate to a frontier market, they are most likely generalizable to similar countries in the Middle East and North Africa region. Practical implications The findings may be useful to various parties including corporate managers, boards of directors, and financial analysts. Given that investment decisions affect shareholder wealth, understanding the practices used by corporate managers is crucial in deciding what projects to undertake. This research raises awareness for management to review their corporate finance practices, compare them with their peers, and examine whether these techniques are aligned with proper allocation of resources and value maximization. Social implications Overall, the findings imply that Moroccan firms have room to improve their corporate finance practices. Failing to do so could have serious implications ranging from the inefficient allocation of resources in the economy to the destruction of shareholder value. Originality/value To the authors’ knowledge, this is the most comprehensive study using survey methodology to investigate corporate finance practices in Morocco. It provides new insights on such topics as capital budgeting, capital structure, cost of capital estimation, and real option techniques.

scholarly journals Capital Budgeting Model and Sensitivity Analysis of the Conventional Oil Production Sharing Contract (PSC) Fiscal Systems: Empirical Evidence from Indonesia

2018 ◽  
Vol 7 (3.21) ◽  
pp. 5
Author(s):  
Wiwiek Mardawiyah Daryanto ◽  
Arti Primadona ◽  
. .
Keyword(s):  
Sensitivity Analysis ◽  
Net Present Value ◽  
Weighted Average ◽  
Mineral Resources ◽  
Oil Production ◽  
Oil Industry ◽  
Capital Budgeting ◽  
Oil Price ◽  
The Government ◽  
To Come

Oil is a vital commodity that controls the livelihood of people. It is also the main resource of state revenue. The oil industry in Indonesia has started since 1883. However, only 40 percent of the total sedimentary basin in Indonesia has been explored since that time (Ministry of Energy and Mineral Resources of Republic of Indonesia, 2015). Accordingly, the major fields are getting drain, while the domestic consumption of oil is increasing. Low investment is one of the factors that cause the declines of oil production. Working Areas (WA) which had been offered to the potential investors by the Government of Indonesia (GOI) during the period ended September 10, 2015, were unsold, followed by unsuccessful of seven WAs offered in the period from July 18 to October 28, 2016, due to an unattractive terms and conditions of PSC Fiscal Systems in the decreasing of oil price situation currently. Oil business requires high capital, high technology, high risks, long terms commitment, but high returns. Therefore, GOI always depends on the private investor to run exploration and exploitation of oil mining. The purpose of this study is to measure the feasibility of oil industry investment and to examine the attractive terms and conditions of PSC Fiscal Systems. The data were collected from the ten PSC Fiscal Systems which had been started the business since 1968 - 2014. Capital Budgeting Model indicators: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Weighted Average Cost of Capital (WACC) were used to analyze the data and sensitivity analysis. The finding shows that the attractive terms and conditions of PSC Fiscal Systems are a maximum split of 50 percent for GOI, under controllable Cost Recovery (CR), the oil price of USD 50.00/barrel, and WACC <20%. The authors believe that the findings will be beneficial for GOI and potential oil investors to carry out a fair negotiation, to come up with a win-win solution.  

scholarly journals Analisis Kelayakan Pengembangan Proyek Apartemen Citra Living Citra Garden City

2019 ◽  
Vol 3 (6) ◽  
pp. 60
Author(s):  
Citra Sari Kusuma Wardhani Dan Yanuar
Keyword(s):  
Sensitivity Analysis ◽  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Urban Migration ◽  
Business Decision ◽  
Cash Flow Sensitivity ◽  
Increasing Demand ◽  
High Level

Jakarta is experiencing a favourite residential growth due to the high level of urban migration to Indonesia’s capital. Therefore, PT CD, through its subsidiary, PT CMG, KSO, tries to fulfill the increasing demand of residential housing by developing a ± 1 ha of land in the West of Jakarta. The development is called the Apartement Citra Living project. This paper is developed to determine the feasibility of the project through cash flow sensitivity analysis. There are 2 (two) assumptions used, which are : the normal, and optimistic assumptions. These assumptions are tested through 4 (four) calculation methods: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI). The results of the sensitivity analysis are as follows Payback periods for the project are 8 months for normal and, 3 months for optimistic; The NPV is positive for all assumptions; The IRR for the normal and optimistic assumptions are higher than the Weighted Average Cost of Capital (WACC) 10%. The PI for normal and optimistic assumptions are more than 1 (one). So, the project is feasible. Therefore, based on the results of the sensitivity analysis of the project’s cash flow, it is concluded that the Apartement Citra Living project is a profitable business decision. To increase profitability level, the company should try to find other financing alternatives to lower the cost of capital.

scholarly journals Analisis Kelayakan Pengembangan Proyek Citra Garden Puri Semanan Citra Garden City

2019 ◽  
Vol 3 (2) ◽  
Author(s):  
Anugrahenny Sekreningtyas
Keyword(s):  
Sensitivity Analysis ◽  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Payback Period ◽  
Urban Migration ◽  
Business Decision ◽  
Cash Flow Sensitivity ◽  
High Level

Jakarta is experiencing a tremendous residential growth due to the high level of urban migration to Indonesia’s capital. Therefore, PT CD, through its subsidiary, PT CAP, tries to fulfill the increasing demand of residential housing by developing a 180,328 m2 of land in the West of Jakarta. The development is called the Citra Garden Puri project.This paper is developed to determine the feasibility of the project through cash flow sensitivity analysis. There are 3 (three) assumptions used, which are : the normal, pessimistic, and optimistic assumptions. These assumptions are tested through 3 (three) calculation methods: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI).  The results of the sensitivity analysis are are Based on the Payback Period calculation, the project is deemed feasible. The current company’s payback period is approximately 4 years, while the payback periods for the project are 24 months, 24 months, a for the normal, and optimistic assumptions consecutively. Based on the NPV calculation, the project is deemed feasible. The NPV is positive for all assumptions. Based on the IRR calculation, the project is deemed feasible. The IRR for the normal and optimistic assumptions are higher than the Weighted Average Cost of Capital (WACC). Therefore, based on the results of the sensitivity analysis of the project’s cash flow, it is concluded that the Citra Garden Puri Semanan project is a profitable business decision. To increase profitability level, the company should try to find other financing alternatives to lower the cost of capital.

Capital budgeting decision-making practices: evidence from Pakistan

2019 ◽  
Vol 16 (2) ◽  
pp. 142-167
Author(s):  
Afeera Mubashar ◽  
Yasir Bin Tariq
Keyword(s):  
Risk Assessment ◽  
Real Options ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Equity Capital ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Content Type ◽  
Listed Firms ◽  
Internal Rate

Purpose The purpose of this paper is to examine the current trends of capital budgeting practices (analysis techniques, discount rate estimations and risk assessment methods) among Pakistani listed firms and analyze the responses conditional on firms’ demographics and executive characteristics. Design/methodology/approach An online questionnaire was sent via e-mail to top 200 non-financial firms (in terms of market capitalization) listed on Pakistan Stock Exchange. Findings With a response rate of 35 percent, it is concluded that the theory–practice gap is low as Pakistani listed firms are using discounted cash flow methods of capital budgeting and preferring net present value over internal rate of return. Similarly, weighted average cost of capital is estimated using target value weights, and capital asset pricing model (with extra risk factors) is used to determine the cost of equity capital. For risk assessment, sensitivity analysis and scenario analysis are the dominant approaches; however despite the theoretical superiority, the use of real options is very low. Overall, investment decision responses significantly differ across firm’s demographics and executive characteristics. Practical implications Pakistani business schools need to address the low usage of advanced methods such as modified internal rate of return and real options among Pakistani listed firms. Originality/value This is the first comprehensive study on the topic in Pakistan and have highlighted the areas of capital budgeting where Pakistani firms’ practices deviates from finance theory.

Corporate finance approaches of Icelandic private firms after the financial crisis

2018 ◽  
Vol 44 (11) ◽  
pp. 1274-1291 ◽  
Author(s):  
Twahir Khalfan ◽  
Jón Þór Sturluson
Keyword(s):  
Financial Crisis ◽  
Corporate Finance ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Banking System ◽  
Capital Budgeting ◽  
Influential Factors ◽  
Private Firms ◽  
Content Type ◽  
The Cost

Purpose The purpose of this paper is to provide insights about corporate finance decision-making of Icelandic private firms that have experienced a dramatic financial crisis in 2008–2010. It observes the capital budgeting methods and cost of capital techniques for private firms after a systemic financial crisis. Moreover, the paper identifies the main determinants of capital structure and capita rationing during this period. Design/methodology/approach This paper surveys corporate finance practices of 80 out of the 250 largest bank-centred private firms after the financial crisis. Findings Highly leveraged private firms that have experienced a dramatic financial crisis in 2008–2010 use payback and net present value techniques almost at a similar rate when assessing new investments. The sample firms largely rely on the cost of debt to determine the cost of invested capital. However, capital asset pricing model is the most popular method among the few sample firms that estimate the cost of equity. The need to maintain financial flexibility and cost associated with financial distress are the most influential factors regarding capital structures, whereas investment practices avoid capital rationing associated with the financial crisis. Research limitations/implications The limitations of the study are that it is country specific and absence of data over the period before the financial crisis that may have been applied to present more insight into this topic. Practical implications Sample firms fail to incorporate appropriate cost of capital methods and as the result they are likely to apply incorrect “hurdle rate” which could undervalue or overvalue new investments. This paper indicates that capital budgeting decisions by managers of the bank-centred Icelandic private firms who tend to be major shareholders do not reflect the tendency to expropriate outside and minority investors. Private firms that have emerged from the meltdown of the financial system highlighting the importance of “special” lending relationship in assisting bank-centred firms to avoid the severity of financial constraints. Originality/value This study employs a failure of the banking system to provide new knowledge about corporate finance practices of private firms after the financial crisis that have curtailed the access to both internal and external sources of capital.

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