Capital Budgeting - Decision Making Practices in Pakistan
11 Pages Posted: 3 Dec 2008
Date Written: October 27, 2008
A number of capital budgeting techniques find place in basic as well as advanced text books on Financial Management and Corporate Finance. Each technique has its pros and cons as a decision making tool.
The research paper investigates the decision making practices of Pakistani companies with respect to Capital Budgeting including the techniques employed and basis for estimation of cost of Capital / Project risk. The paper also examines the linkage between the techniques employed and various factors such as; size of investment outlay, nature of industry, company size, growth rate and capital structure. Also probed is the extent of delegation of decision making authority in respect of capital budgeting decisions. Further, the respondents' views on relative popularity/significance of the techniques and reasons for the same have also been studied. Furthermore, the differences in techniques and decision making practices of local and foreign companies operating in Pakistan have also been looked into.
The information/data for the above stated purpose was collected through a questionnaire from sample companies listed on the Karachi Stock Exchange (KSE).The main findings extracted from the responses to the questionnaire are, that key decision makers in Pakistani firms are quite aware of and practically using sophisticated capital budgeting techniques. The study shows that bigger size companies give greater preference to IRR, while smaller firms rely more on NPV. Also smaller firms are keener in estimating the pay back period (PP) as compared to larger companies. Consciously or unconsciously the firms relying more on debt financing or with high growth rates give more preference to the NPV technique, while low leverage and low growth firms rely more on IRR.
Keywords: Internal Rate of Return (IRR), Net present value (NPV), Payback period (PP), Modified Internal Rate of Return (MIRR), Accouting Rate of Return (ARR)
JEL Classification: G31
Suggested Citation: Suggested Citation