This document summarizes a presentation on a survey and analysis of capital budgeting techniques. The presentation: 1) Surveyed 407 large US firms on their use of capital budgeting techniques like payback period, accounting rate of return, internal rate of return, and net present value. It found the most popular technique was payback period, used by 74% of firms. 2) Analyzed the discount rates used, finding the weighted average cost of capital was most common. The average after-tax discount rate was 11.4%. 3) Found project risk was usually assessed subjectively, with 60% of respondents using subjective judgment for risk assessment.

1. COURSE TITLE: SEMINOR IN FINANCE COURSE CODE: MPH 622
Presentation on
Survey and Analysis of Capital Budgeting
Methods
Written by:
Lawarance. D. Schall, Gary L. Sundem and William R. Geijsbeek, Jr.
University of Washington and Finance Manager, The Boeing Company
Published in: Journal of Finance, Vol. XXXIII, No. 1, March 1978
10th April, 2011

2. Article Outline
I. Background
II. Survey sample and findings
A. Sample
B. Results
III. Analysis of results
IV. Conclusions

3. Presentation Outline
Background & Objectives
Motivation of the study
Research Methodology
Major Findings
Conclusions
Comments

4. Background
Istvan (1961), Klammer (1972) and Fremgren (1973)
and Lawarance, et.al (1977) are the only previous
works concentrated towards the gradual sophistication
of capital budgeting techniques in the area of finance.
The insight of the study emerges from the mutual needs
of such kind of works from both the academicians’ and
practitioners’ area of interest.
The study thus try to entitle the needful blend.

5. Back…..
Objectives
i) To find the most popular CBTs employed in
practices.
ii) To explore the computation of discount rates and
cash flows, and
iii) To identify the method of estimation and
adjustment of project risk.

6. Research Gap:
 The need of further assessment of CBTs, as
suggested by the trend of limited previous works.
 The growing concern over the use of CBTs in
practices.
 Implications of the results.
Motivation

7.  Population: large US firms which are included on the
COMPUSTAT tape.
 Selection of sample (424 firms) constitute 3 condition;
 i) net plant assets exceeding $200 million,
 ii) capital expenditures exceeding $20 million, or
 iii) net plant assets exceeding $150 million and capital
expenditures exceeding $10 million.
 Since the inability of 17 firms, only 407 firms were
entertained for the survey.
 Major financial officers are the respondents .
 Response rate was 46.4%.
Methodology

8. Method…
 Variables:
 Payback period (PBK)
 Accounting rate of return (ARR)
 Internal rate of return (IRR)
 Net present value (NPV)
 Cost of debt
 Cost of equity
 Weighted average cost of capital (WACC)
 Growth and dividend payout ratio, and
 Risk-free rate
 Tools : The study uses the naïve methods for
analysis which includes frequency distribution,
range and percentile.

9. Major findings
Model Percentage Remarks
PBK 74% Most popular
ARR 58%
IRR 65%
NPV 56%
 The most popular
techniques is PBK (74%).
Percentage of resp. firms
using each possible combination of CBTs
Model Used
% of firms
using models
PBK, ARR, IRR, NPV 17
PBK, ARR, IRR 14
PBK, ARR, NPV 9
PBK, IRR, NPV 9
ARR, IRR, NPV 2
PBK, ARR 8
PBK, IRR 8
PBK, NPV 7
IRR, NPV 7
ARR, NPV 4
ARR, IRR 2
IRR 6
ARR 4
NPV 2
PBK 2
101*
The use of IRR or NPV or
both techniques constitute
over 86% and only 16% use
one or both without using
ARR and PBK.

10. Percent of the 140 firms that use a discount rate using each cost of capital method
Use measure
exclusively
Use measure in
combination with others
Total %
Using
Cost of debt 7% 10% 17%
Cost of equity 1 8 9
WACC 31 16 47
A measure based upon past experience 14 6 20
Expectations w.r.t. Growth and
Dividend payout 8 9 17
Return from a Rf asset plus a premium
associated with the risk 3 5 8
Another rate 12 4 16
WACC is one of the most popular discount rate and it is used by
about 51% of the US firms.
And, the remaining use a variety of methods.

11. Distribution of COC for the 69 firms using an
after-tax COC
% COC No of firms % of firms
7.0 - 7.9 3 4
8.0 - 8.9 3 4
9.0 - 9.9 2 3
10.0 - 10.9 30 43
11.0 - 11.9 4 6
12.0 - 12.9 11 16
13.0 - 13.9 0 0
14.0 - 14.9 5 7
15.0 - 15.9 8 12
16.0 - 16.9 2 3
17.0 + 1 1
69 99
After tax discount rate is used
by major firms (88%) and the
average rate 11.4%.
Before tax average discount rate
14.3%.
The most common method of
predicting cash flow is predicting
net income (NI) first and then
adjust of non-cash flow items.

12. Risk assessment (189 firms)
Assessment method Percent
Quantitative 36
Subjective 60
Do not assess 4
Majority (60%) of the respondents
use the subjective judgment for risk
assessment.
Only 4% of the respondents do not
assess the risk.
Individual project risk assessment (43
firms)
Assessment method Percent
Probability of cash flow 25
Sensitivity analysis 10
Covariance of CF with
others 4
Subjective evaluation 57 +
Over 57% firms use subjective
evaluation, followed by probability of
cash flow.
Sensitivity analysis also used by
10% of the firms.

13.  Klammer (1972) and Fremgren (1973) on study of CBTs
shows the increasing trend of its use for the investment
decision making. Former showed 39% and later 67% of the
decision based use CBTs. Lawarance, et.al (1977) found 78%
as the increasing parameter of popularity. On top of the
previous works, the study suggest that 86% of the firms use
more than one CBTs.
 After-tax WACC is the most common method of determining
a required rate of return.
 Project risk is usually assessed subjectively, and
 The level of sophistication in CBTs is positively related to
the size of the firm’s capital budget and negatively related to
risk.
Conclusions

14.  The study use the simpler methods of analysis so that
readers can easily understand the theme.
 The findings could impart the understanding about the
importance of CBTs and its pervasive use from the very
beginning.
 The results of the study are very much useful to the
learners and beginners (practitioners), and
 The study was conducted by the authors from the
academic and practitioner field of finance, thus it is an
interesting blend of two opponents.
Comments

15. Thank you.