Capital budgeting practices in Nepal (A survey)

PRESENTED BY:Grisha Yadav

Kohinoor Thapaliya

Krishna Chalise

Mani Manandhar

Manisha Baral

Netra Bdr. Khatri

Pawan Kawan

Introduction:

Significance of capital budgeting decision. Several studies have been carried out on the practices of

capital budgeting by Mao, Donaldson, Petty etc. In the context of Nepal no such recent studies exits

except for an old study by Pradhan & Adhikari (1998).

Financial resources for capital investment, Financial objectives, Quality factors, Capital budgeting techniques, Cash flow forecasting methods, Minimum returned standard, Definition of risk and qualitative factors.

To finding out the adequacy of:

Purpose:

Followings are the studies made in capital budgeting practices:

Mao (1970), Donaldson (1972), Fremgen (1972), Klammer (1972), Myers (1968), Petty, Scott and Bird (1975), Schall, Sundem, and Geijsbeek, Jr. (1978), Jog and Stivastava (1995), and Kester et. al. (1999).

Cont…

• The use of sophisticated capital budgeting practices has increased considerably by the organizations in developed economies.

Cont…

• The study of capital budgeting practices has received less attention in Nepal.

• The state of art is unknown in the context of Nepal. No Valid and reliable findings are available.

Cont…

• As per the Article, Questionnaire Survey of 65 financial executives was conducted in 2006.

Questionnaire contents: • Background information on respondents, • financial resources, • financial objectives, • capital budgeting evaluation methods, • cost of capital, and • risk in capital budgeting. • 75 questionnaires were distributed and out of which

65 usable questionnaires

Cont…

• Data were collected through questionnaire survey of financial executives.

• The questionnaire contained questions on background information on respondents, financial resources financial objectives capital budgeting evaluation methods cost of capital and the risk in capital budgeting

• 65 questionnaires represented 28 financial institutions, 12 hotels, 10 manufacturing enterprises, and the rest represented trading and services enterprises.

• The analysis of this study contained comparison of the findings of this findings with the earlier study on capital budgeting.

Study Methodology

•Of the total sample enterprises,5 % were 5 years old or less26% were 5 to 10 years old39% were 10 to 15 years old15% were 15 to 20 years old rest were more than 20 years old

•Emphasis was placed on the large-sized organization24% of the enterprises had an annual sales of Rs. 100 million36% had an annual sales of Rs.100 to Rs.200 million28% had an annual sales of Rs.200 million to 300 millionThe rest had an annual sales of Rs. 300 million or more

Respondent’s profile

• Capital budgeting begins with resource enterprise.

• Indentify the adequate financial resource.• Split parts– Fixed investment – Recurring expenses required for fixed investment.

Presentation and analysis of data

Nature of Fixed investment Recurring expenses

ResourcesAdequate ModerateInadequate Don’t know

No1119296

%1729459

No341993

%5229145

Total 65 100 65 100

Cont…

• Presentation and analysis of data • Investment in fixed Assets• Financial objective of investment decision . • Quantities evaluation technique for selection of investment

project. • Qualitative factor in evaluation of investment projects.• Minimum rate of returns standard in capital budgeting decisions• Cash flow forecasting methods • Response of cash flow forecasting methods for respondents

using quantitative methods. • Definition of Risk • Risk analysis technique.

Data Analysis

Inadequate resources for investment in fixed investment.

Plan to increases investment in fixed assets. Most popular financial objective was maximizing

percent return on assets investment. Most preferred method of capital budgeting was

accounting rate of return. Legal was the most preferred qualitative factor.

Conclusion

Management determined target rate of return was minimum rate of standard.

Risk in capital budgeting was the probability of not achieving target return .

Not use any formal risk analysis techniques.

(Survey shows that capital budgeting techniques used by Nepalese enterprises are not sounds).

Cont…

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