Capital Investment Appraisal Techniques: A Survey of Current Usage

Abstract

This paper seeks to show that organisational change, fuelled by the expansion of information technology, may have contributed to the erosion of the previously established relationship between company size and the quantitative investment appraisal criteria selected. It finds that companies are using more methods together, that usage of the more sophisticated discounted cash flow techniques is higher, and that usage of the less theoretically sound accounting rate of return technique is lower, than previous studies would have suggested for companies of the size involved. It suggests that the size/method selection relationship may only be identifiable when the companies involved are all part of one study, or the studies compared are contemporaneous.

Capital Budgeting Methods Used in Some European Countries and in the United States

“…Of the two discounted cash-flow methods presented in the study, decision-makers preferred the internal rate of return to the net present value in the United Kingdom. In 1989 Sangster [9] carried out a survey among 500 major Scottish corporations and obtained similar results to that of Pike's. 78% of the respondents used the payback period for evaluating the efficiency of investments, 58% of them used the internal rate of return, 48% of them reported using the net present value while the least used technique was the accounting rate of return.…”

What Determines the Use of Capital Budgeting Methods? Evidence from Swedish Listed Companies

“…The use of capital budgeting methods by U.S. and European listed companies has been studied extensively (e.g., besides those already mentioned, Pike, 1988Pike, , 1989Pike, , 1996Pike and Sharp, 1989;Sangster, 1993;Block, 2007;Hermes et al, 2007). [1] There have also been some earlier studies of Sweden (Renck, 1966;Tell, 1978;Yard, 1987;Andersson, 1994;Segelod, 1995;Sandahl and Sjögren, 2003;Holmén and Pramborg, 2009;Hartwig, 2012).…”

Capital Budgeting Theory and Practice: A review and agenda for future research

“…Capital budgeting is a vital part in financial planning and decision making since capital budgeting tools leads better decision making and be able to justify selection of specific capital investments among competing alternatives (Sekwat,1999).Decision to choose the best investment project among competing projects is of critical and being taken by top management (Bowman and Hurry, 1993;McGrath, Ferrier and Mendelow , 2004), and considerable attention is thus to be given to investigating the methods used in evaluating and selecting investment projects (Sangster, 1993;Segelod, 1998).…”