Effect of Capital Budgeting Techniques on the Financial Performance of Real Estate Industry in Nairobi County, Kenya

Abstract

The real estate industry is very important for its contribution to the economic growth of a country. This study aimed at establishing how various CBT had impacted on the financial performance of Nairobi’s real estate industry. This research analyzed past literature by identifying relevant themes and then thematic text analysis was employed. Thus, this research is subjective and adopted inductive approach in order to answering research questions. As this research covered last 10 years of research papers carried out in the area of capital budgeting from 2006 to 2015, this study adapted research strategy of longitudinal research design. The population of the study consisted of 149 registered real estate companies in Nairobi County, Kenya. The sample size for the study was 50 firms selected from the targeted 149 firms. The researcher collected primary data using questionnaires. The collected data was checked for completeness, coded and captured into MS Excel for analysis. Descriptive and inferential statistics were used to analyze data by way of means (measure of central tendency) and standard deviation (measure of dispersion). The study found out that real estate companies rely on NPV in decision making, ARR is useful in decision making at real estate companies, real estate companies rely on IRR in making replacement decisions and independent project decisions, IRR as an appraisal technique considers time value, real estate companies rely on PI to make replacement decisions, PBP is useful among the real estate firms as it helps making lease or buy decisions, ARR helps real estate companies to make mutually exclusive decisions and that other techniques of capital budgeting are useful in making lease or buy decisions. The study concludes that NPV is consistent with the concept of maximizing the shareholders’ wealth; NPV affects financial performance of real estate companies. IRR affects financial performance of real estate companies. There is also an effect of ARR on financial performance of real estate companies. PI also affects financial performance of real estate companies. The study recommends that NPV should be particularly used by real estate firms in making mutually exclusive decisions and independent project decisions, real estate firms should choose a method that considers the time value of money, real estate companies rely on PI to make independent project decisions and contingent project decisions, real estate firms should also adopt the use of PBP in making independent project decisions, real estate firms should adopt ARR in making mutually exclusive and independent project decisions and that real estate companies ought to adopt other techniques of capital budgeting in making lease or buy, mutually exclusive project and independent project decisions.