A Survey on Capital Budgeting Techniques Practiced by the Sri Lankan Commercial Sector

Abstract

Capital Budgeting (CB) is one of the most important areas of firms’ decision making process that contributes to long term growth of the firm. Various Capital Budgeting Techniques (CBTs) are being widely used among financial expertise. Several techniques are commonly used to evaluate capital budgeting projects such as Discounted Cash Flow techniques such as Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI)) and Non-Discounted Cash Flow techniques such as Payback Period (PP) and Accounting Rate of Return (ARR)). Recent studies highlighted that financial managers favor methods such as the NPV, IRR or PP techniques (Lawrence, et al., 1997). The use of techniques is varying with different factors including organizations, managers, and size of the project. This study particularly finds the Capital Budgeting Techniques (CBT) practiced in Sri Lankan commercial sector organizations. A semi-structured questionnaire survey was conducted to gather empirical findings with the selected sample. It was found that majority of the firms are using NPV as a primary CBT while the second is given to PP and IRR respectively. Some firms adopt more than one technique to be a primary tool and it was highlighted that NPV and IRR as the most commonly used combination in project evolutions. The study found that majority of the firms adopts Weighted Average Cost of Capital (WACC) as an independent measure of cost of capital. It was revealed there is a high tendency towards adopting CBTs to evaluate the projects in Sri Lankan commercial sector.