Capital budgeting practices in South Africa: A review

Abstract

This paper reviews the capital budgeting survey literature in South Africa over the period 1972 to 2008. The survey evidence indicates a significant growth in Discounted Cash Flow (DCF) methods and a fall in the use of other methods. In particular, there has been growth in the use of Net Present Value (NPV). Yet, the Internal Rate of Return (IRR) technique remains the primary method used in practice despite some serious drawbacks. Larger companies are more likely to use DCF methods. There has been a significant growth in the use of sensitivity analysis and scenario analysis. However, there is little use of sophisticated risk analysis tools such as Monte Carlo simulation, and decision trees. Although financial theory predicates the use of risk adjusted discount rates, surveys indicate that the majority of companies use a single firm discount rate. Companies have increasingly used inflation-adjusted cash flows but the process of ranking mutually exclusive projects is not aligned with finance theory. There is limited use of the Modified Internal Rate of Return (MIRR) method and DCF dominant companies do not outperform non-DCF dominant companies. The most important phase of project evaluation is the project definition and cash flow estimation phase and yet research studies have focused mainly on the financial analysis and project selection phase.

Practices of performance measurement in companies in the Republic of Serbia

“…The same comparison could be made with G. Sandahl and S. Sjögren (2003), who found out that the large companies were the ones to more frequently use the DCF method than the small ones. Again, there is a partial congruence with C. Correia (2012), who found out that those larger companies preferred the DCF metrics, and that the small fi rms used the PP and the ARR to a greater extent. Our fi nding, as well as M. G. Danielson and J.…”

“…The overall conclusion of the study was that practice signifi cantly deviates from theory, especially in the domain of the capital structure, but also in the domain of capital budgeting. After this study, a number of later studies sought to confi rm or deny the Graham-Harvey fi nding or to analyze the practice from new perspectives Sandahl & Sjögren, 2003;Brounen, De Jong & Koedijk, 2004;Dedi & Orsag, 2007;Truong, Partington & Peat, 2008;Verma, Gupta & Batra, 2009;Baker, Dutt a & Saadi, 2011;Correia, 2012;Andrés, Fuente & San Matin, 2014).…”

“…Opšti zaključak studije je da praksa značajno odstupa od teorije, posebno u domenu strukture kapitala, ali i u investicionom odlučivanju. Posle ove studije, brojna kasnija istraživanja imala su za cilj da potvrde ili opovrgnu nalaze J. R. Graham-a i C. R. Harvey-a, ili, pak, da praksu analiziraju iz neke nove perspektive Sandahl & Sjögren, 2003;Brounen, De Jong & Koedijk, 2004;Dedi & Orsag, 2007;Truong, Partington & Peat, 2008;Verma, Gupta & Batra, 2009;Baker, Dutt a & Saadi, 2011;Correia, 2012;Andrés, Fuente & San Matin, 2014).…”

“…Slično poređenje može se učiniti sa rezultatima G. Sandahl-a i S. Sjögren-a (2003), koji iznose da velike kompanije češć e koriste DCF metod nego male. Dalje, postoji delimična podudarnost sa rezultatima C. Correia-a (2012), koji otkriva da veća preduzeća preferiraju DCF merila, a da mala preduzeća koriste PP i ARR u već oj meri. Naš nalaz, baš kao i nalaz M. G. Danielson-a i J.…”

Management Accounting Practices in Srilanka: Investigation in Banking Sector

“…According to his views, he mentioned that there is a link between the usage of discounted cash flow and the firm size and the capital intensity. When the capital intensity is high, there more using discounted cash flow methods in firms by doing the survey [15,16].…”