Professional Documents
Culture Documents
FACULTY OF COMMERCE
BY
SUPERVISOR: MR MAVAZA
The undersigned certify that they have supervised the student Ndofirepi
Tadiwanashe Phillip's dissertation entitled An investigation into the impact of
inflation on capital budgeting decisions. A case study of Delta Beverages
Masvingo Sorghum for the period 2000 – Dec 2008 submitted in Partial
fulfillment of the requirements of the Bachelor of Commerce in Accounting
Honours Degree at Great Zimbabwe University.
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SUPERVISOR DATE
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CHAIRPERSON DATE
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EXTERNAL EXAMINER DATE
RELEASE FORM
SIGNED: …………………………………………………
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PERMAMENT ADDRESS: 6731 Matsapa Crescent
Mucheke D
Masvingo
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TABLE OF CONTENTS
APPROVAL.........................................................................................................ii
RELEASE FORM................................................................................................iii
DEDICATION....................................................................................................iv
TABLE OF CONTENTS........................................................................................v
ACKNOWLEDGEMENTS...................................................................................viii
ABSTRACT........................................................................................................ix
LIST OF TABLES................................................................................................x
LIST OF APPENDICES........................................................................................xi
ACKNOWLEDGEMENTS
The author would like to thank all those who contributed towards the completion
of this study, especially my supervisor Mr. Mavaza. I am sincerely grateful for the
knowledge and guidance you imparted to me. Thank you also to all my siblings,
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relatives and friends for their support. May you the good Lord bless you. The
following people from Delta Beverages are appreciated for assisting the author
with valid information; Nyasha Denga, Grace Dunira, Success Mpepu, and
Lovemore Mufaduku. Thank you so much for making this research project a
success.
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ABSTRACT
The research covered the period 2000-2008, the period that Zimbabwe
questionnaires were the research tools used. The responses reflected that
Beverages. The conclusion therefore was that It is critical that capital budgeting
measurement tool.
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LIST OF TABLES
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LIST OF APPENDICES
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CHAPTER 1
INTRODUCTION
1.1 Introduction
The chapter looks at the background of the study, statement of the problem, purpose
to Dec 2008 affected decisions about which capital projects were to be undertaken
before making any capital budgeting decisions. Inflation was one of the important
parameters that governed the financial issues especially capital budgeting decisions.
alternatives. Some of the alternatives considered may involve more risk than others.
For example, one alternative may fairly assure future cash flows, whereas another
may have a chance of yielding higher cash flows but may also result in lower returns.
It is because, apart from other things, inflation plays a vital role on capital budgeting
decisions and is a common fact of life all over the world. Inflation is a common
problem faced by every finance manager which complicates the practical investment
“Of late, Zimbabwe has been experiencing instability both on the political and
economic front. The level of inflation has exceeded quad digit level standing at
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898,876,3% as of December 2008 according to official statistics” (The Standard 18
January).
Most of the managers are concerned about the effects of inflation on the project’s
profitability. Though a single digit rate of inflation has become a notable feature in
Zimbabwe, management should consider this factor carefully while taking such
decisions. Also to be noted are the Zimbabwe’s recent indigenisation laws which
recognise that inflation exists but rarely incorporate inflation in the analysis of capital
budgeting, because it is assumed that with inflation, both net revenues and the
project cost will rise proportionately, therefore it will not have much impact. Inflation
influences two aspects viz. Cash Flow, Discount Rate and hence this study is an
attempt to analyse the issues in the area of effects of inflation on capital budgeting
industries leading to shrinkage in both local and foreign direct investment. Delta
Beverages has not been immune to these expected benefits being eroded by
inflation. There is need to find ways by which entities can effectively and efficiently
and reap the desired financial gains from the investment projects being undertaken.
There should be ways taken by companies in order to cushion themselves from the
negative effects of hyperinflation, even if the recession period has come to an end
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The study was carried out in order to fulfil the requirements of the degree program at
efforts.
1.5 Objectives
✔ To examine the problems and benefits associated with applying the standard
environment.
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ALTERNATIVE: Capital expenditure decision-making is not made difficult by
1.2 Assumptions
✔ Data and information provided by the respondents are free from bias.
1.2 Delimitations
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environment to decision making. The thrust of the study was to see how the
hyperinflation.
in long term financing needs of the company and prepare capital budgets
1.3 Limitations
• Resources are limited so as to produce a well- detailed project. This ranges from
financial constraints as well as time. The research was carried out concurrently
• For the sake of confidentiality, respondents may deny the researcher access to
information they consider sensitive. The researcher had to work with information
income and this limits the research efforts to make a more detailed research.
1.11Summary
This chapter looked at the at the background of the study, statement of the problem,
assumptions, definition of terms, delimitations, limitations of the study and the next
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CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
This chapter provides a review of the literature on capital budgeting .It looks at the
various literature that have dealt with inflation trends in Zimbabwe, financial decision
making and economic instability, cost of capital and inflation, the fisher effect,
efficient frontier technique, risk free rate, cash flows and inflation, discounted cash
flow, incremental analysis, inflation versus product pricing and investment behavior
and research design and methodologies of data gathering.
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2.2 Inflationary Trends in Zimbabwe
The diagram below highlights the inflation trends in Zimbabwe for a ten-year period
depicting hyperinflation from 1996 to 2006.
According to Mills (1996), “A major impact on both financial theory and the practice
of financial decision making has been the economic instability, especially in prices,
evidenced in the U.S. economy since the mid 1960’s. Inflation in the past few years
has not been a major macroeconomic problem, but its specter, as demonstrated by
the Federal Bank recent increases in interest rates, is never for the agendas of
expectations about the future rate of inflation be taken into consideration in making
decision(s) about which capital projects will be undertaken by the firm. Nominal cash
flows determine its degree of profitability. However, in making the capital budgeting
i.e. assets that provide cash flow benefits for more than one year. We are trying to
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Will the future benefits of this project be large enough to justify the investment given
Additionally, most capital projects will involve numerous variables and possible
outcomes. For example, estimating cash flows associated with a project involves
project revenues, assess competitive impacts of the project, and determine the life
cycle of the project. If our capital project involves production, we have to understand
i.e. discounted cash flows. We must look at the entire decision and assess all relevant
Decision Model (MADM). Multiple attributes are involved in capital projects and each
hierarchy to structure the decision and derive the importance of attributes in relation
to one another. We can think of MADM as a decision tree, which breaks down a
Arnold (2002) asserts that inflation creates two problems for project appraisal. First, the
estimation of future cash flows is made troublesome. The project appraiser will have
the degree to which future cash flows will be inflated. Second, the rate of return
required by the firm’s security holders such as shareholders would rise if inflation
rises. Thus, inflation has an impact on the discount rate used in investment evaluation.
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2.1 Cost of Capital and Inflation
Cost of capital is the required rate of return on the various types of financing. Due to
the various forms of financing in investments, firms tend to use the overall cost of
capital which the proportionate of the costs of the various components of the firm’s
financing which are equity capital, debt and preferred stock. Due to hyperinflation
preferred stock is not used, as it cannot appreciate in value against rampant inflation.
In explaining the relationship between cost of capital and inflation, Bailey and
Jensen (1977), state that it has been argued that the market rate of interest already
embodies the price level effect and that the rate will be unique. This statement in
itself is unusual, since the argument that nominal rates of interest, hence the nominal
cost of capital, contain an inflation premium back to the Fisher effect and is generally
accepted. Since the discount rate is a major determinant of the investment decision,
its relationship to inflation is of more than just passing interest in determining the
theory that states that an increase of inflation rate also causes an increase in interest
rates this will also have an impact on the movement of cost of capital when inflation
occurs.
Since it is reasonable to expect that the rate of interest will increase when the are
expectations of higher inflation, the cost of capital on an ex ante basis increases with
the same proportion as the expected rate of inflation; that is, the same mechanism
which causes interest rates to rise during inflation will also cause the cost of capital
to rise. Short-term phenomena may prevent the cost of capital from behaving
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precisely in this fashion. One action may be for business to alter capital structure,
moving towards greater amounts of debt and thus lowering the after tax cost of
capital. However, these corrections are not long term and in case of rising debt costs
should have little impact on the overall movement of capital from rising proportionally
with expected inflation, but this too should not prevent a long term assumption that
the cost of capital does increase when the expected rate of interest rises.
One of the most important concepts that we need to master is the impact of
fundamental relationship here is the Fisher Effect first formalised by Irving Fisher in
his famous 1900 text (though the roots of the notion can be traced back to the
famous philosopher David Hume in the 18th century). Fisher’s fundamental insight is
that Capital Market participants are always guessing what future inflation will be and
building these guesses of future inflation into the yields on the securities that they
Fisher argues that Capital Markets should constantly be assessing future inflation
and building that guess into interest rates. He posited that there is a real rate of
interest in addition to the nominal rate that we observe in the market. Where the
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Copeland et al, (1992), show that since investment and security returns are based
on expected future returns, the anticipated inflation rate should be reflected in the
required rate of return on the project or the applicable cost of capital for the project.
(1+r)(1+n) = (1+k),
Where k is the required rate of return in nominal terms, n is the anticipated annual
inflation rate over the life of the project, and r is the real rate of return. Thus the
market data that is used in estimation of current costs of capital should include a
required returns of the firm’s security holders. However, when we estimate these
yields on the stocks and bonds, we know we that these are nominal rates that
include the guesses of future inflation. On the other hand, we should consider what
Gitman (2003) charges that, changes in inflationary expectations affect the risk –
Rf = k + IE
Drury (2000) further notes that, inflation affects future cash flows and the return that
shareholders require on the investment (i.e. the discount rate). The discount rate
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consists of the required rate of return on a risk less investment plus a premium that
is related to a project’s risk, inflation affects both the risk-free interest rate and the
risk premium. A further analysis of this situation will then lead to the Fisher Effect
(explained above) that relates nominal rate of interest to the real rate of interest and
Elton and Gruber et al (2003), further analyse the issue employing the efficient
frontier technique. The concept is widely used in practice to make asset allocation
decisions for long-term investment, particularly for pension fund assets. They argue
how the change in the purchasing power of currency affects investment choice. In
particular, investors may care more about future purchasing power value of the
portfolio, which is the value after adjusting the effects of inflation, than they care
about the future nominal value of the portfolio. Thus one approach to this problem is
to apply the efficient frontier technique to inflation – adjusted returns. This therefore
it is important to make sure that the returns that are being expected from such
investments are inflation adjusted and one method is the use of the efficient frontier
Van Horne et al (2003) notes that it is important that the risk –free rate and the
expected market return are the best possible estimates of the future. This is to try by
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all means to make the best assessment of the project being undertaken to consider
its viability.
Copeland (1992) further gives more detail by explaining inflation risk in relation to
States and the inflation in England is uncertain, the dollar value of America’s
investment in England at the end of the period is uncertain and hence risky. There is
an exchange risk and it is clear that the exchange risk is simply an inflation risk.
important to distinguish between real rate of interest and the nominal rate of interest.
He explains that real rate of interest is comprised of two elements: (a) a risk- free
element – the “pure” rate of interest that is paid on long-term government bonds, and
(b) a business –risk element – the risk premium above the pure rate that is
demanded for undertaking risks. Nominal rate of interest is also comprised of two
elements: (a) the real rate of interest, and (b) an inflation element – the premium
demanded because of the anticipated decline in the general purchasing power of the
monetary unit. Thus the inflation premium is of importance in dealing with huge
Van Horne (1971) says that to be consistent, inflation in forecasting cash flows must
nominal cash flows are discounted at the real and not nominal cost of capital.
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According to Drury (2000), the increase in cash flows from year to year due to
monetary unit. Rather than expressing cash flows in one-year monetary units it is
more meaningful to express the cash flows in today’s purchasing power or monetary
unit (that is, in real cash flows). When cash flows are expressed in monetary units at
the time when they are received they are described as nominal cash flows whereas
cash flows expressed in today’s (that is, time zero) purchasing power are known as
real cash flows. Therefore, nominal cash flows are converted to real cash flows by
inflation) n
Where n is the number of years the cash flow is expected from the project.
Van Horne (2003) gives insight into the issue by stating that in estimating cash
flows, anticipated inflation must be taken into account. Often there is tendency to
assume erroneously that inflation levels will remain unchanged throughout the life of
the project. If the required rate of return for a project to be accepted embodies a
premium for inflation, (as it usually does), then estimated cash flows must also reflect
inflation. Such cash flows are affected in several ways. If cash inflows ultimately
arise from the sale of a product, expected future prices affect these inflows. As for
cash outflows, inflation affects both expected future wages and materials costs.
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This therefore entails that all cash flows must be discounted for, so as to give a more
accurate measure of the real value of the cash flows. Discounted Cash Flow analysis
is a family of techniques that include Net Present Value, Internal Rate of Return and
which is used to find NPVs, and as the hurdle rate if Internal Rate of Return
ii. NPV = Σ CF
(1+k) t
inflation rate, the larger the value of k and other things being equal, the
iii. If inflation is expected, but this expectation is not built into the forecasted
cash flows, then the calculated NPV will be incorrect –it will be downward
biased. This therefore calls for sales prices over the life of the project to be
This analysis explicitly shows that inflation effects must be considered in project
analysis, the best procedure being to build inflation effects directly into cash flow
estimates.
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a. Internal rate of Return
Besides determining the Net Present Value of a project, we can calculate the rate of
return earned by the project. This is called the Internal Rate of Return. Internal Rate
of Return (IRR) is one of the most popular economic criteria for evaluating capital
projects since managers can identify with rates of return. Internal Rate of Return is
calculating by finding the discount rate whereby the Net Investment amount equals
the total present value of all cash inflows; i.e. Net Present Value = 0.
If the Internal Rate of Return were higher than our cost of capital, then we would accept
the project. For example, assuming an IRR of 8% and a cost of capital of 12%, we
would not invest in this project as the expected returns are below the market rate of
capital.
b. Profitability Index
Pike and Neale (2002) advances that, the profitability index is the ratio of the
present value of project benefits to the value of initial costs. Projects with Profitability
index greater than 1.0 are acceptable. The P therefore gives the present value of
benefits per $1 of initial outlay. As such, it indicates the ‘profitability’ per $1 invested,
and is thus a measure of the productivity or financial efficiency of the project. This
PI = PV benefits
PV outlay
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Since the index is also a function of discounted cash flows, it is expressed with a
PI = NPV
PV of outlay
All these discounted cash flow techniques show that a proper appraisal of a project
in n economically unstable environment, all the cash flow that are expected from the
environment.
incremental activity. Project cash flows usually arrive throughout the year and these
cash flows may involve monthly payments to creditors and expenses, daily receipt of
cash from customers throughout each year. Thus these cash flows should be
identified on a monthly, even daily, basis and discounted using appropriate discount
factors. Businesses generally operate as going concerns with fairly clear strategies
isolation but as part of a sequence of actions seeking the organization from its
current to its intended position. Thus the decision maker must assess how the
business changes as a direct result of selecting the project. Every project can be
either accepted or rejected, and it is the difference between these two alternatives in
any time period, t, expressed in cash flows (CFt) that is taken into the appraisal. The
Project CRt = CFt for firm with project – CFt for firm without project.
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The incremental analysis thus shows that even when evaluating a project by the
analysis can be done by comparing the firm’s discounted cash flows with those of a
firm without a similar project. The project is worthy taking if the comparison proves
favourable to the firm. Above all, the impact of inflation on the cash flows is of major
concern.
Mills (1996), explains that in traditional capital budgeting theory, the equilibrium
position will be such that the firm will continue to invest up to a point where marginal
costs equal marginal revenues. Citing an example where the current assets of a firm
are $ 10 million and current liabilities excluding debt are $ 5 million, then a 10%
increase in prices will increase both current assets and current liabilities by 10%.
Current assets would rise by $ 1 million, but current liabilities by $ 500 000, leaving $
decision-making process, or else the net cash flow and the net present value are
overstated. The question that now has to be solved is how will the deficit covered
makers factoring this effect in the prices that will be charged in the products that will
Poor planning may result in charging prices that are not viable or that will result in
the depletion in the capital base of the investment, as hyperinflation will outdo the
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project’s capacity to finance itself internally through net cash resources from sales of
the prices. This therefore means that for the project to continue to survive in
Inflation may reflect leads and lags in costs and revenues that are not fully
rate.’
Thus hyperinflation has a major impact on investment appraisal and this should be
carefully taken into account before a project is launched so that the pricing will give
The impact of inflation on product pricing can also be further expounded in the
following way. Managers can only accept equal increases in revenues and costs if
they are willing to lower the amount of profit acceptable from a capital project. And at
the margin, the effect introduction of inflation would cause the project to be rejected.
Rappaport and Taggart (1982) state that there is no requirement that this rate be
the economy wide inflation rate, but for most firms one would expect that the rate to
be reasonable approximation of the case for the cost side of the firm. Thus inflation
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of revenues must tend to be larger than inflation of costs if the NPV is to remain the
same.
At this point consider the following example. In Table 1, data is given for two nearly
required. A requires $200,000 and B requires $200,000 but A’s investment is in net
TABLE 1
Project A Project B
Years 5 5
Discount Rate 3% 3%
Inflation Rate 0 0
If the missing variable is to be solved from the above situation, the price of the
project necessary to justify the undertaking of the investment that is the price at
which the NPV is zero, then for case A and B the price is as follows:
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Case A: $260.91 Case B: $296.67
The higher price in Case B is the result of the fact that only 45% of investment costs
are recovered through the tax shield from depreciation, whereas 100% of the net
working capital is recovered. It is true that the depreciation is recovered faster, but at
a low discount rate this faster recovery is not sufficient to overcome the loss of 55%
of the initial investment on a cash basis. The results above are for a world with zero
inflation. If we introduce inflationary expectation of a steady rate, say 12% into the
system, the results would be to increase both costs and the discount rate. If we
assume that the relationship between inflation and the discount rate is as previously
described, 12% inflation would produce a 15.36% discount rate. If we increase the
product price by the amount of the expected rate of inflation, and test for NPV we
NPV
Case A ($101,637)
Case B ($ 33,302)
The substantially lower NPV for Case A reflects the problems caused by the
presence of net working capital during periods of inflation. In this case the inflation
causes an addition to the net working capital each year, and the additions are cash
outflows, which are not recovered until the end of the project. In case 2, the only
effect was to reduce the tax flow from the depreciation shield. Thus if prices only
kept pace with inflation, both projects are unacceptable, but the project with the
higher net working capital is more unacceptable. The degree to which prices must
increase to bring the investment back to an acceptable level can be computed. For
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Case A Case B
12% Inflation
Case A, with its net working capital, requires almost a doubling of the rate of cost
inflation in order to keep the company’s project profitability unchanged, while Case B
requires only a slightly higher than inflation price increase. This therefore means that
unchanged, product pricing must not be overtaken by the inflation rates but must
implications for corporations, and these implications go beyond the capital budgeting
decision. Certainly the capital budgeting decision itself is significantly affected by the
is that the capital budgeting decision is not neutral even if prices of output are
expected to rise at the same rate as costs and the cost of capital. Mills (1996) notes
that the implications of an increase in the expected rate of inflation on the capital
1. Assuming the firm could not raise output prices above the general rate of
inflation, the firm would have to accept lower NPV and hence lower
greater than the general expected rate of inflation. The exact amount, which
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prices would have to be raised, is dependent upon the degree of net working
2. A firm does have a number of ways in which it can respond to the problems
created by inflation. There are three major areas that could be addressed in
an attempt to offset the negative impact of rising price levels. One action
would be to raise output prices above the level of inflation, but the ability of
the firm to do so will be limited to the extent that the market will withstand the
higher prices. Market structure will play an important role here, with the more
oligopolistic firms enjoying greater success than the more competitive firms.
However, in the long run, this will lead to high inflation and thus may be self-
defeating. Unless other adjustments are made, the investment sector of the
3. Two internal adjustments that can be made are with respect to net working
capital and the capital structure. As the previous analysis has shown, during
inflation firms will be under pressure to reduce the amount of net working
With respect to the discount rate, the major adjustment that a company can make is
in its capital structure. The inflationary increase in the discount rate can be offset to
some degree by increasing debt in the capital structure and lowering the weighted
cost of capital. This action, however, is not available to all firms, only to those who
begin the inflationary period with a relatively low amount of debt in the capital
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structure. Due to the above, one would expect that the degree of leverage employed
by firms increases during inflationary periods. Moreover, to the extent that this is
“unplanned” debt, it is more likely a firm would finance this debt from short term
rather than long-term borrowings. As the inflation eased, the firm would find it much
easier to return to a more normal capital structure by replacing short-term debt with
retained earnings. This would suggest that the demand for short-term funds would
This research used the descriptive survey. This is so because the data suitable for
this research was qualitative in nature. The researcher used questionnaires and
carried out personal interviews with the finance department and management.
2.2 Summary
This chapter, identified and examined the literature related to the main elements of
and economic instability, cost of capital and inflation, the fisher effect, efficient
frontier technique, risk free rate, cash flows and inflation, discounted cash flow,
incremental analysis, inflation versus product pricing and investment behaviour and
research design and methodologies of data gathering. The next chapter looks at
research methodology.
CHAPTER 3
RESEARCH METHODOLOGY
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3.1 Introduction
This chapter gives a description of the research methodology, embracing all the
activities and procedures undertaken during the study. The chapter outlines the
research design, the population, and the sample, sampling procedures, research
instruments, the questionnaire method, the interview method, data collection data
In this research, a descriptive survey design was used. A descriptive study is used
factual data was collected by the researcher from a given sample through data
collection methods.
problem model. Descriptive research is appropriate when problems are fairly well
defined but the purpose is not to investigate the relations. Eriksson and
3.2 Population
The population of this study was all the senior managers, supervisors and finance
department members at Delta Beverages Masvingo Sorghum for the period from Jun
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2000 to December 2008 and anyone with meaningful impact on the investment
living in the same place at the same time hence it is a group from which the sample
sample is a small group of people taken out of the mother group (population). The
that of the population from which it is drawn. The sample was comprised of four
managers, five supervisors and six finance department members as shown in Table
3.1 below.
Management 4
Supervisory 5
Finance 6
Total Size 15
this study the sampling unit is the finance department and senior management.
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3.4 Sampling procedures
In this study random sampling was used. The subjects were drawn from a sample of
management and the finance department as they are heavily involved in the capital
budgeting process. The respondents were chosen on the basis of their strategic
influence on to the capital budgeting system at the company. The sample consisted
of a total of fifteen people, four managers, five supervisors and six finance
department members.
the collection of data consistent with the pre-determined research objective. The
In order to find the extent to which the problem of inflation affects the capital
budgeting process this research employed the questionnaire and interview methods
for data collection from the finance department and management at Delta Beverages
Masvingo Sorghum.
used in data collection. Data are the facts presented to the researcher from the study
environment. It is from this data that the researcher draws conclusions for the
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research study. In this case, it is the data specifically collected to investigate the
pilot testing helped the research in correcting areas where the pilot respondents
pointed out that needed clarity. Interview guidelines were also analyzed by the pilot
Interviews with top management were conducted on the same day as questionnaires
respondents used to collect data from the research subjects. Tuckman (1978) a
appropriate for analysis. The questionnaire carried fifteen questions which were
based on three research questions of chapter 1 of this study seeking to find out the
The researcher chose the use of questionnaires as one of the main research tool
due to the various advantages that are brought about from the use of questionnaires.
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✔ A questionnaire saved time and was an inexpensive way of surveying a large
✔ A questionnaire allowed the researcher to align and narrow participants along the
✔ Close-ended questions were also used which allowed easy analysis to reduce
ambiguity and to clarify the opinions of the population were the open ended
Despite the advantages outlined above, the use of questionnaires had the following
limitations with respect to the acquisition of data by the researcher. These are
✔ Questionnaires might have been unclear or vague to respondents who did not
unanswered questionnaires.
Both open and close-ended questions were used. Close ended questions were used
because they were easier to administer and faster for data tabulation. Open-ended
questions required respondents to answer in their own words. They were used
because they do not restrict the respondent thus widening the scope of response
obtained. Open-ended questions were used and they gave information, which was
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The researcher carried out four in-depth interviews to solicit information from
the interviewer who is not allowed to deviate in any way from provided questions.
Implying that during the interview notes the responses made by the interviewee as
opposed to the questionnaire method where the respondent writes responses on the
questionnaire.
✔ The researcher had a great deal of flexibility and used his ingenuity to stimulate
sensitive questions especially the ones that involved the firm’s finance system.
✔ The researcher was able to use non-verbal communication during interviews and
interview.
• Respondent held back some important information when they felt that It would
not be in their best interest should it be known that they disseminated the
information.
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Data summarisation was used in this study. Initially the questionnaires were checked
for physical completeness. Qualitative data from the open-ended questions was
charts, tables, bar graphs, and tables will be used, in the next chapter, to present
and analyze both primary and secondary data that was collected by the researcher.
Responses were condensed to avoid ambiguity for example strongly agree and
3.8 Summary
Descriptive research method was used in the research that is, both qualitative and
efforts. Questionnaires and interviews were used as tools for collecting data because
they were easy to administer and appropriate for the research. The next chapter
CHAPTER 4
4.1 Introduction
This chapter presents, analyses, interprets and discusses research findings of the
study. In this chapter, the researcher presented the findings in graphs, pie charts,
interviews
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Three of the sixteen questionnaires were sent to top management and five to
supervisors, seven were sent to the finance department. Four interviews were also
conducted with the top management. From total fifteen questionnaires planned and
distributed only twelve were returned and a total of four interviews were conducted
with to management and all were carried out. The three unanswered questionnaires
were for some finance department members who were committed to month-end
processing.
distributed undertaken
Interviews 4 4 100%
Questionnaires 15 12 80%
Table 4.1
The percentage response rate was 100% from interviews with management and
80% for questionnaires. The high response rate by management was due their
commitment to learn how they could prepare themselves to make capital investment
The researcher gathered some findings detailed in this chapter on the impact of an
95% of the respondents indicated they were well versed with the hyperinflationary
macro-economic environment also showing that a moment in time had dealt with it.
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The understanding however by most of them showed they basically saw it dealing
1% did not know what hyperinflation meant at all. The pie chart below summarises
Fig 1
The researcher has observed that when inflation is high, projects with shorter life
spans will be favoured over those with longer expected lives because those with
shorter life spans will have their depreciation costs restated in current dollars more
Discounted Payback, and Profitability Index (PI) were being used by the company
due to uncertainty and incorporation of the inflation rates that are prevailing and the
anticipated inflation rates. Fig 2 below shows the ratings according to the responses
the researcher received showing NPV as the most used measure in an inflationary
Fig 2
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4.2.3 The relationship between hyperinflation and capital budgeting.
The above question was asked to assess if those involved in capital decision-making
their products.
✔ The cash flows from production are Insufficient such that the capital
capital
The questions here aimed at ascertaining whether the company engaged the correct
people to make capital investment decisions and how they were rated. The research
has established that the executive procurement committee which was the firm’s
ultimate expenditure decision making body did have knowledgeable persons. In their
own opinion and in the opinion of management the finance department was rated in
Fig 3 as follows:
Fig 3
3
4.2.5 Workshops and Training
Majority of the respondents revealed that the entity ensured that their employees are
kept well up to date with the changes in the macro-economic environment. Most
employees highlighted that the knowledge at their disposal had been acquired from
workshops and less general sources such as the news, newspapers and economic
commentators addressing the public in general. This was also shown from data
environment. Fig 4 below shows the relevance of sources of information and their
Fig 4
The analysis shows that out of the four interviewed respondents, the majority
attributed the causes of hyperinflation to both political and economic factors. The
economy was failing due to politically motivated reasons. It therefore came out that
the economy was dependent on the stability of the political situation in our country.
Politics touched areas like the agricultural sector, manufacturing sector, and also the
tertiary sector. It was from this that it was derived that the causes of hyperinflation
were not independently economic and political but it was a combination of the two.
Fig 4
3
Further in the analysis it was observed that though factors could affect the firm
management said they could still steer through them making wise capital investment
decisions.
4.1 Summary
This chapter focused on the findings of the research, analysis and discussion of data
collected in relation to the set research objectives and research questions. The next
3
CHAPTER 5
5.1 Introduction
environment.
3
✔ Uncertainties caused by hyperinflation resulted in the company struggling to
flows and the appropriate discount rate to be used in evaluating the projects
some of the projects that had been planned as the funds were eroded by
inflation.
Return and Profitability Index; were still being used when contemplating on
caused by hyperinflation.
✔ The company had a solid training foundation in terms of how the macro-
5.1 Recommendations
recommend and manage projects and should be responsible for the funds
relating to the project. The EPC should manage the funds; source the
required funds in time, investing any excess funds to counter the negative
hedging.
1
✔ If the prices of outputs and the discount rates are expected to rise at the same
rate, capital budgeting decision will not be neutral Delta management should
raise the output price above the expected rate of inflation. Unless it has lower
Net Present Value which may lead to forego the proposals and vice versa. If
the company is unable to raise the output price, it can make some internal
the engagement of experts who are at disposal from within firm and even
The study was on the impact of inflation on capital budgeting decisions particularly
study and laid out the statement of the problem, the hypothesis and the objective of
the research. Chapter two reviewed literature from expects highlighting their views
revealed the methodology that was used by the researcher. Chapter four analysed
1
and presented the research findings communicating information gathered during the
investigation.
5.2 Conclusion
In view of the study’s findings, the hypothesis is that capital expenditure decision-
2
REFERNCES
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London
New York
Cooper, D.R. and Schindler, P.S (2003). Business Research Methods 8th Edition,
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Publishing, London
Elton, E and Gruber, M (2003) Modern Portfolio Theory and Investment Analysis, 6th
Publishers, London
Leedy, D. (1993). Practical Research, Planning And Design. 5th Edition Eaglewoods
Mehta, D (1988) Chief Financial Officer 1st Edition Eaglewoods Cliffs, MacMillan, Inc,
New Delhi
1
Mills G, (1996) Journal for Financial and Strategic Decisions Number 1, Volume 9
Pike, R and Neale, B (2002) Corporate Finance and Investment 2nd Edition Prentice
Rappaport, A and Taggart R (1982) Financial Management 1st Edition, Wiley College
Volume 7
Wiedersheim, L.T and Eriksson, L.T (1997) Research methods, 6th Edition, Liber-
Hermod, Malmo
Zikmund W.G and Amico M.D (1996). Marketing 5th Edition, West Publishing
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www.smater.com
www.investopedia.com
3
APPENDICIES
Appendix A
Instructions
b) Show response by ticking the respective answer box where applicable and or filling
1. Do you understand the relationship that exists between capital budgeting and aggregate
inflation?
YES NO
______________________________________________________________________
______________________________________________________________________
3. State how you view traditional investment appraisal methods when used in an
inflationary environment?
______________________________________________________________________
______________________________________________________________________
___________________________________________________________________
5
4. How did hyperinflation affect capital budgeting efforts of the entity?
______________________________________________________________________
______________________________________________________________________
___________________________________________________________________
5. Did the Executive Procurement Committee (EPC) have someone who was well versed
YES NO
6. Were any workshops held or attended that related to financial management in a volatile
environment?
YES NO
7. How capable do you rate your finance team in executing capital budgeting calculations?
8. Did you face any challenges in making capital expenditure decisions? , give your answer
______________________________________________________________________
______________________________________________________________________
___________________________________________________________________
3
Appendix B
Instructions
b) Show response by ticking the respective answer box where applicable and or filling
1. In your view was the finance team able to handle capital budgeting well in the
hyperinflationary environment?
YES NO
2. What variables did you consider important in working out capital expenditure figures?
______________________________________________________________________
______________________________________________________________________
__________________________________________________________
YES NO
4. What investment appraisal method did you use to evaluate capital projects in the
unstable environment?
1
______________________________________________________________________
______________________________________________________________________
__________________________________________________________
5. How accurate were your appraisal methods given the environmental volatility?
___________________________________________________________________
___________________________________________________________________
________________________________________________________________
___________________________________________________________________
__________________________________________________________________
7. Did the department recommend any capital expenditure activity in it period? YES
NO
YES NO
THANK YOU!!!
Appendix C
1
Interview Schedule
2. Explain your understanding of the relationship that exists between capital budgeting
3. Did you use any traditional investment appraisal methods in the hyperinflationary
environment?
5. What motivated the company to make investment decisions despite the uncertainty
caused by hyperinflation?
6. What investment appraisal method did you use to evaluate capital projects in the
unstable environment?
8. In your view is the organisation ready to deal with capital budgeting in any