A survey of capital budgeting techniques used by companies listed at the Nairobi stock exchange
Abstract
The heart of Financial Management lies in making decisions that will
maximize the value of the firm. Probably the most important financial
decisions involve those whose results will be felt over an extended period.
Capital investment decisions are some of the very vital decisions taken by
management of organizations. They are not easily reversible and place
organizations on new paths leading to long-run survival or ultimate failure.
To make sound capital budgeting decisions, theory advocates for the use
of a systematic approach which involves, a continuous and creative search
for investment opportunities, forecasting the supply and cost of funds for
investment purposes, estimating each project's cash flows and other
benefits, ranking and choosing among competing projects, post-auditing
already committed investments and strategic capital budgeting. Use of
discounted cash flow techniques, incremental cash flow approach, project
specific cost of capital and risk analysis have been strongly advocated by
academicians.
Empirical evidence shows that management of corporations do not
necessarily follow theoretically sound techniques but to some extent use
techniques from the "dark- ages". It is however reassuring to note that
organizations are gradually coming to use more refined techniques in their
capital budgeting analysis. What remains of great concern to most
managementis the problem of increasing complexity of activities and the
environment in which they operate.
This study set out to determine the capital budgeting techniques used by
companies listed at the Nairobi Stock Exchange, to ascertain whether the
techniques used conform to theory and to practices of organizations in the
developedeconomies as evidenced by studies done in these economies.
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This study surveyed 43 companies listed at the Nairobi Stock Exchange
about the capital budgeting techniques that they employ in their capital
investment decisions. Most companies ignore the first stages of the capital
budgeting process. Companies are concerned about incorporating risk in
their capital budgeting process. Most companies employ non-discounted
cash flow techniques to evaluate investment proposals. Companies use
cost of specific source of funds and management determined target rates
of return to determine project discount rate. Companies consider strategic
aspects of capital budgeting and do engage in post auditing of completed
projects. No relationship was established between firm, CEO and project
characteristics and capital budgeting techniques.
Citation
Masters of business administrationSponsorhip
University of NairobiPublisher
school of Business, University of Nairobi