This document summarizes past research on capital budgeting practices in the United States and surveys capital budgeting practices in six Asia-Pacific countries. A survey was conducted of large companies in Australia, Hong Kong, Indonesia, Malaysia, the Philippines, and Singapore. The survey found that discounted cash flow techniques like NPV and IRR were considered important but companies varied in their use of discount rates. Risk assessment favored scenario and sensitivity analysis over CAPM.

2. Research Context
• This paper reports the results of surveys of executives of companies in six countries of the
Asia-Pacific region regarding their companies’ capital budgeting practices.
• The surveyed countries include Australia, Hong Kong, Indonesia, Malaysia, the Philippines,
and Singapore. The survey questionnaires included such topics as capital budgeting decision
rules, risk analysis, discount rates, cost of equity capital rationing.
• These surveys are part of a continuing research effort to assess the views of executives of
countries of the region on issues related to corporate financial policy.
• Executives of large corporations in the United States have been extensively surveyed
regarding their companies’ capital budgeting practices, especially during the 70s and 80s.
• Among the numerous surveys include those reported by Mao (1970), Klammer (1972),
Fremgen (1973), Petty, Scott, and bird (1975), Gitman and Forrester (1977), Schall, Sundem
and Geijsbeek (1978), Kim and Farragher (1981), Hendricks (1983), Klammer and Walker
(1984), Bierman (1993), and Trahan and Gitman (1995).

3. To be contd…..
• These surveys, which have focused on methods of evaluating project profitability and risk,
have shown that the sophistication of the Analytical techniques used by United States
executives has increased over time. Discounted cash-flow (DCF) techniques, such as net
present value (NPV) and internal rate of return (IRR), have become the dominant method of
evaluating and ranking proposed capital investments.
• For example, where Klammer (1972) found that only 19% of his sample of large industrial
companies used DCF techniques to evaluate and rank projects in 1959, the percentage increased
to 57% in 1970. Hendricks (1983) reported that the percentage was 76% in 1981. In a 1992
survey, Trahan and Gitman (1995) found that both the majority of responding Fortune 500 large
firms and the majority of responding Forbes 200 best small companies used DCF techniques.
• Bierman (1993) reported that 99% of the respondents in his 1992 survey of the 100 largest
Fortune 500 companies used IRR or NPV as either the primary or secondary evaluation
measure. Correspondingly, the use of non-DCF techniques such as payback as the primary or
secondary evaluation measure has declined. For example, Hendricks (1983) reported that only
11% of the companies in his 1981 survey used payback as a primary technique for project
evaluation and ranking, compared to 34% in 1959, as reported by Klammer (1972).

4. To be contd…..
• Farragher, and Leung (1987) surveyed a sample of large companies in Malaysia. In Hong
Kong, and Singapore. They found that payback was the most popular primary measure for
evaluating and ranking projects in Malaysia. In Hong Kong, they found payback and
accounting rate return (ARR) to be equally the most popular.
• In Singapore, they found payback, IRR, and ARR to be equally the most popular. They
concluded that companies in Malaysia, Hong Kong, and Singapore prefer to use several
techniques as primary measures of evaluating and ranking investment projects. The authors
also found that companies in Malaysia, Hong Kong, and Singapore do not undertake much
risk analysis.
• The most popular risk-assessment techniques were sensitivity and scenario analysis. In a 1983
survey of Malaysian companies, Han (1986) also found payback to be the most frequently
used techniques for evaluating and ranking projects. He further reported that the most popular
methods of adjusting for risk were shortening the payback period and requiring higher rates
of return for risker projects.
• In Australia, surveys of capital budgeting practices have been reported by McMahon (1981),
Anderson (1982), Lilleyman (1984), and freeman and Hobbes (1991).

5. Objective of the study
• This study aims to elicit information regarding capital budgeting practices in
Australia, Hong Kong, Indonesia, Malaysia, the Philippines, and Singapore.

6. Study Methodology Model Specification
• The author surveyed the executives of companies listed on the Australian Stock
Exchange, Stock Exchange of Hong Kong, Jakarta Stock Exchange, Kuala
Lumpur Stock Exchange, Philippine Stock Exchange, and Stock Exchange of
Singapore.
• Mail questionnaires were used to obtain information. Regarding topics related to
capital budgeting practices.
• The two-page questionnaires, which were mailed either to the sample
companies’ chief executive officers (CEO’s) or chief financial officers (CFO’s),
consisted of various closed-ended and open-ended questions about their
companies’ capital budgeting practices.
• With the exception of the Philippines, the same questionnaire was used in all of
the countries surveyed. The questionnaires were written in English and did not
require the respondents to identify themselves or their companies.

7. Major Findings

13. Conclusion
• Executives from the surveyed countries consider DCF techniques such as NPV and IRR to
be more important than non-DCF techniques for evaluating and ranking capital investment
projects.
• They also expressed a preference for using scenario and sensitivity analysis to assess risk,
which is also consistent with practices in the west. However, when selecting the discount
(hurdle) rates used for project evaluation, the practices of companies differed across the
surveyed countries.
• The practices also conflict with a basic principle of finance theory, that the return required on
an investment and the return available elsewhere from investments of similar risk. In other
words, if proposed investments are heterogeneous with respect to risk, a multiple-risk-
adjusted discount rate system should be employed. Otherwise, accept-reject decisions will be
biased in favor of poor high-risk investments and against good low-risk investments.

14. To be contd…..
• Only about half of the Philippine executives responding to the survey indicated that their
companies use multiple risk-adjusted discount rates.
• Less than half of the respondents in the other countries use multiple rates. Instead, they use a
single discount rate based upon the company’s overall WACC or the specific capital used to
finance the project under consideration. The latter of course conflicts with the rationale
behind WACC, which suggests that investments projects are financed out of debt, preferred
stock, or common stock.
• From the survey results, it would appear that the CAPM has yet to become widely adopted in
the Asia-Pacific region. In a telephone survey of 27 US firms judged by their peers to be
“among those with the best financial management,” Bruner, Eades, Harris, and Higgins
(1998) found that the CAPM is the dominant model for estimating the cost of equity capital.
• Over 80% of the respondents use the CAPM. Although Australian executives expressed a
strong preference for the CAPM approach, it is used by less than a third of the responding
companies in the other countries for estimating the cost of equity capital.
• The CAPM is even less popular as a technique to determine project discount rates based
upon project betas. It is not used at all by the responding companies in Indonesia, Malaysia,
and Singapore and by relatively few responding companies in other countries.