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).
Purpose:To finding out the adequacy of: 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.
Cont… 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
Study Methodology• 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.
Respondent’s profile• Of the total sample enterprises, 5 % were 5 years old or less 26% were 5 to 10 years old 39% were 10 to 15 years old 15% were 15 to 20 years old rest were more than 20 years old• Emphasis was placed on the large-sized organization 24% of the enterprises had an annual sales of Rs. 100 million 36% had an annual sales of Rs.100 to Rs.200 million 28% had an annual sales of Rs.200 million to 300 million The rest had an annual sales of Rs. 300 million or more
Presentation and analysis of data• Capital budgeting begins with resource enterprise.• Indentify the adequate financial resource.• Split parts – Fixed investment – Recurring expenses required for fixed investment.
Cont… Nature of Fixed investment Recurring expenses Resources No % No % Adequate 11 17 34 52 Moderate 19 29 19 29 Inadequate 29 45 9 14 Don’t know 6 9 3 5 Total 65 100 65 100
Data Analysis• 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.
Conclusion 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.
Cont… 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.