A survey of capital investment appraisal techniques used by commercial parastatals based in Nairobi
Njiru, Benard M
MetadataShow full item record
This study sought to identify the most commonly used capital investment appraisal technique by commercial parastatals and determine the factors that influence the choice of capital investment appraisal technique used by the parastatals. Thirty (30) commercial parastatals were targeted but twenty (20) responded. A questionnaire was used to collect primary data. Descriptive statistics in particular, the arithmetic mean and standard deviation was used to interpret responses to the questionnaires. The analysis revealed that on average, the annual size of capital budget is 1.4% of the total asset base the organization studied implying low intensive capital investments over studied period (2003-2008). All the parastatals have a capital investment policy. Further, identification of investment opportunity was identified as the first stage in the capital investment process, followed by development of cash flow estimates. Authorization for spending capital expenditure, project evaluation and monitoring of capital investment were third, fourth and fifth stages respectively in the capital investment process. The results further revealed that incorporating risk in the capital investment is the most serious challenge that parastatals face in the capital investment appraisal process followed by determining the appropriate discount rate then incorporating inflation in the capital investment. The three main capital investment appraisal techniques used by commercial parastatals are; internal rate of return (IRR) (65%), net present value (NPV) (25%) and payback period technique (10%). Apparently, discounted cash flow techniques are more preferred than non-discounted cash flow techniques among commercial parastatals studied. Lastly, amount of funds required for the capital investment, size of the organization, government policy and industrial practices are the main factors that influence the choice of the capital investment appraisal techniques.