Capital budgeting practices in Nepal, MBA-II, Uniglobe College, Kathmandu, Nepal

1. Capital budgeting practices in Nepal
(A survey)
PRESENTED BY:
Grisha Yadav
Kohinoor Thapaliya
Krishna Chalise
Mani Manandhar
Manisha Baral
Netra Bdr. Khatri
Pawan Kawan

2. 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).

3. 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.

4. 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).

5. Cont…
• The use of sophisticated capital budgeting
practices has increased considerably by the
organizations in developed economies.

6. 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.

7. 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

8. 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.

9. 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

10. 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.

11. 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

12. 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.

13. 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.

14. 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.