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A SURVEY OF CAPITAL BUDGETING PRACTICES IN CORPORATE INDIA

Satish Verma, Sanjeev Gupta and Roopali Batra
The present study aims to unveil the status of capital budgeting in India particularly after the advent of full-fledged globalisation and in the era of cutthroat competition, where companies are being exposed to various degrees of risk. For the above objective a comprehensive primary survey was conducted of 30 CFOs/CEOs of manufacturing companies in India, so as to find out which capital budgeting techniques is more preferred, discounted or non-discounted. The study also aims at examining the capital budgeting methods used for incorporating risk in investment proposals. It further endeavours to evaluate the impact of different factors or variables on the selection of a particular capital budgeting technique. For example, it was investigated that whether there exists any relationship between a size of company’s capital budget and the method of capital budgeting adopted by it. Similarly it was discovered that is there any systematic relationship between different company related factors like age of a company, CEO education/qualification and the capital budgeting method adopted by it. Key Words: Capital Budgeting, Discounted Cash Flow, Non Discounted Cash Flow, NPV, IRR, Payback Period, ARR, Discount Rate, Cost of Capital, Risk

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INTRODUCTION

irms invest in long term assets in anticipation of an expected flow of benefits over the lifetime of the capital asset. It involves sacrifice of a certain amount of present resources in exchange for a future return and an arbitrage over the time that involves risk. For evaluating these investments or projects, various capital budgeting techniques or methods are available. While certain companies still prefer old non-discounted less sophisticated techniques, others have moved towards more sophisticated discounted cash flow (DCF) techniques. The traditional non-discounted techniques though used rigorously initially, are today mostly applied as a supplementary method in combination with the discounted cash flow techniques. The earlier studies conducted in India emphasised mainly on the capital budgeting practices in times when the level of competition and the entry and exit of

multinational companies in India was restricted. In the post liberalisation era, after the government relaxed the entry and exit rules for foreign companies in India and gave a vent to full fledged globalisation, no major Indian study except that by Anand (2002) has been conducted. However, even after this time a number of changes further took place in the Indian economic environment. The government was opening up in other sectors like power, insurance, banking and allowing private participation in many new areas. As a result of these measures initiated by the government, in the years 2005-06 the economy grew at a steady pace. There was a spurt in foreign investment through Foreign Institutional Investors (FIIs) and the rupee strengthened against the dollar. Unprecedented changes took place in various financial sectors like banking, insurance etc and a number of global mergers took place with MNCs entering in each and every sphere of business. There was a boom in the foreign trade with increasing exports and foreign reserves resulting in

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capital budgeting. However the studies of 1980’s (like Pandey (1989) found that Payback Period Method was most popular followed by IRR Method. Further, sensitivity analysis and conservative forecasts were found as the most preferred method for evaluation of investment risk. Beginning from the early 1990s, Ken Leonore and U. Rao Cherukuri (1991) in the case of large U.S. companies concluded that IRR was the most preferred choice followed by the NPV method. They found that evaluators used multiple evaluation methods. The most widely accepted discount rate was ‘weighted average cost of capital’ (78%) and for measuring risk ‘sensitivity analysis’ (80%). Similar results were found by Bierman (1993) in a survey of 74 Fortune 100 firms. Similarly Drury, Braund and Tayles’ (1993) survey of 300 manufacturing units, pointed towards preference for payback (86%) and IRR (80%) techniques of investment evaluation. Sensitivity analysis was found to be the most widely used project risk analysis technique. The use of sophisticated risk analysis techniques like CAPM or Monte Carlo simulation was very limited due to lack of understanding. Petry and Sprow (1993) found that about ninety percent of the firms use NPV and IRR and 60 percent used the traditional payback period, either as a primary or as a secondary method for capital budgeting decisions. Babu and Sharma (1995) observed that discounted cash flows (DCF) methods were applied by as many as 75 percent of the respondent companies. Sensitivity analysis and adjustment of discount rate methods were found popular for handling risk. Similarly Dhanker’s (1995) study revealed that 16 percent companies used DCF techniques and 33 percent traditional methods like Payback and Accounting Rate of Return (ARR). Further, 51 percent of companies incorporated risk by adjusting the discount rate and 45 percent used Capital Asset Pricing Model (CAPM). The studies of Jog and Srivastava (1995) and Pike (1996) supported this and found that payback period method was the most preferred method in companies of Canada and the United Kingdom. Cherukuri (1996) selected top 300 non-government companies and compared their capital budgeting practices with those of Hong Kong, Malaysia and Singapore. The study revealed that 51 percent of the respondent companies used IRR, 30 percent used NPV and 38 percent and 19 percent respondents used respectively the payback period and ARR methods. About 90 percent of respondent firms used shortening the payback period and 59 percent used sensitivity analysis for incorporating risk. Further, Cherukuri (1996) in his survey of 74 Indian
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mounting Indian stock markets. By the end of the year 2007, the economy and its stock market reached at its peak. However, there was a sudden slowdown of Indian markets after 2007 (January, 2008). The year 2008 was indeed very turbulent and unstable for Indian corporate sector, under the adverse impact of gloomy and miserable foreign markets. As a consequence, Indian stock markets crashed down, dollar became stronger resulting in expensive imports and reducing foreign exchange reserves. Thus, the Indian business environment today has become highly turbulent with companies being prone to numerous risks like exchange rate risk, interest rate risk, inflation etc and only the globally competitive and professionally managed companies can thrive in such an unstable environment. For achieving this, the companies are focusing even more on effective financial management practices and are greatly concerned about core financial issues like capital structure, cost of capital, working capital management and most of all investment appraisal or capital budgeting. Thus, in the current era, there is a need to re-examine and re-study the corporate practices regarding capital budgeting decision particularly when a number of changes have taken place in the economic and business environment both in domestic as well as in global markets since the last few years, which had a considerable impact on the investment scenario that has been very risky. This may as well influence the investment appraisal techniques especially risk techniques employed by the companies for evaluating their investment proposals. There is also a need to study different factors which affect the choice of capital budgeting techniques including risk techniques. The present study is an attempt to fill the void in this context. REVIEW OF LITERATURE In the 1960s, the capital budgeting studies (Miller (1960) and Mao (1969)) observed an increasing preference for non-discounted capital budgeting techniques especially the Payback period method. In the 1970’s the studies (Petty (1975), Chandra (1975), Porwal (1976), Schall; Sundem and Geijsbeck (1978) and Bhattacharya (1979)) observed an inclination towards the use of Discounted Cash Flow method especially IRR method. A trend towards incorporation of risk was also indicated by these studies. It was during this time that certain studies (Hertz, 1979) focused specifically on the risk aspect of
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companies found that a majority of these (51 percent) used IRR as investment evaluation criteria. The nondiscounted techniques like ARR and Payback Period Methods were mainly employed as supplement to the DCF techniques. Chadwell-Hatfield, et al., (1997) found that more than 70 percent preferred high IRR and 84 percent NPV as one of the methods in appraising projects. Nearly twothirds of the firms believe that acceptable project should have shorter payback period in addition to either high IRR or NPV. Stanley Block (1997) studied the small business firms for evaluating capital budgeting techniques used by them in 1990’s and found that payback period (42.7%) was most popular method, followed by ARR (22.4%). However, it was noticed that the small business owners have increased their sophistication as over 27 percent used discounted cash flow as the primary method of analysis. For inclusions of risk consideration, higher required returns either in form of increasing the cut-off rate or shortening the minimum payback period was preferred by 46.3 percent of the firms. Jain and Kumar (1998) in a study of 96 nongovernment companies listed on Bombay Stock Exchange in India and 5 companies of South East Asia observed that the most preferred method was Payback Period Method (80% companies) followed by NPV and IRR. For incorporation of risk companies’ preferred sensitivity analysis followed by higher cut off rate and shorter payback period. However Kester and Chang’s (1999) survey of 226 CEOs from Australia, Hong Kong, Indonesia, Malaysia, Philippines, and Singapore, found that DCF techniques such as NPV/IRR are the most important techniques for project appraisal and sensitivity analysis and scenario analysis for project risk assessment in all these countries The beginning of 2000 was marked by certain ground–breaking landmark studies in the area of capital budgeting. Graham and Harvey’s (2001) survey of 392 CFOs revealed that the firms which are large, with high debt ratios, having CEOs with MBA are significantly more likely to use DCF techniques like NPV and IRR than their counterparts. Similarly large firms are more likely to use risk-adjusted discount rate while small firms prefer Monte Carlo simulation for risk adjustment. Similar results were observed by Ryan and Ryan (2002) in a study of Fortune 1000 companies. He observed NPV was most popular technique followed closely by IRR. Additionally, firms with larger capital budgets tend to prefer NPV and IRR. Popular supplemental methods used

along with NPV and IRR included sensitivity analysis, scenario analysis, inflation adjusted cash flows, economic value added, and incremental IRR. Over these years certain noteworthy studies in India were also conducted. In a study of Indian corporate finance practices by Anand (2002), NPV criterion was observed to be a widely used capital budgeting technique followed by IRR. For incorporation of risk, risk adjusted discount rate; sensitivity analysis and scenario analysis were also widely preferred techniques for project risk analysis. However, the use of decision tree analysis and Monte Carlo techniques was limited .The study also confirmed findings of Graham and Harvey (2001) and Ryan and Ryan (2002) that size significantly affects the practice of corporate finance and large firms rely heavily on NPV techniques and CAPM, while small firms are relatively more likely to use payback criterion. Similarly large firms are more likely to use sophisticated project risk analysis techniques, such as risk-adjusted discount rate, decision tree, and Monte Carlo simulation, than the small firms. Another study by Parkash Singh and Gaur (2004) concluded that in case of acceptance or rejection of a project in real life situation, an IRR criterion does not conflict with NPV but in case of comparison across projects, the two methods give different ranking. As per the study, the best method is to transform NPV into proportion and thus benefit cost ratio is used to avoid contradictions. A contemporary study by Holmen (2005) of capital budgeting techniques used for FDI’s by Swedish firms also reaffirmed the findings of earlier studies of 2000. The study indicated that larger firms are more likely to use NPV method or IRR method than small firms. As per the survey, payback method was the most preferred capital budgeting technique, used by nearly 79 percent of the sampled units. Truong, Peat and Partington (2007), in a survey of capital budgeting practices of Australian listed companies observed that NPV, IRR and Payback were the most popular project evaluation techniques. It was also found that real options techniques have gained a foothold in capital budgeting but are not yet part of the mainstream. In another study by Brijlal, Pradeep (2008), he investigated a number of variables and associations relating to capital budgeting practices in small, medium and large businesses in the Western Cape Province of South Africa. The results revealed that payback period, followed by NPV, is preferred across different sizes and sectors of business. Moreover, 64 percent of businesses surveyed
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Delhi, Mumbai, Calcutta, Chennai, Bangalore, Ludhiana etc. The structured questionnaire included closed ended questions regarding use of discounted/non-discounted and risk adjusted techniques of capital budgeting, and the cost of capital on the Likert scale of 1 to 5. The questionnaire prepared was finally put on a website so that it could be filled online and directly submitted to the investigator. An attachment file of the copy of questionnaire was also sent along with covering letter CFO/Finance Manager/ Director Finance of nearly 100 companies, so that in case the respondent has problem in accessing the web link, he/she can download the questionnaire from the file attached. From these 100 mails sent, 15 companies responded. Subsequently the questionnaire was re-mailed for follow up in order to maximise the response rate. It was indicated to the CFOs that the individual responses would be kept strictly confidential and only aggregate generalisations would be published. On repeated mails 15 more companies responded taking total usable responses to 30. The detailed description of the sample characteristics is discussed in Table 1 below
Table 1: Descriptive Statistics of the Sampled Units Panel A: Classification of Sampled Companies on Basis of Size of Capital Budget Size of Capital Budget (In Rs.) <10 million 10-99 million 100-499 million 500-999 million > 1 Billion Total Type of Industry Mining/Construction Electronics and Electrical Equipments Transport and Automobiles Hardware /Software Development Chemicals/Dyes/ Pharmaceutical/ Fertilizer Textiles Automotive Parts and Equipments Others Total
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used only one technique, while 32 percent used two to three different types of capital budgeting techniques. The large businesses favoured IRR and NPV more as compared to that of small businesses and more than two thirds of businesses used non-quantitative techniques to consider risk while investing in fixed assets. OBJECTIVES OF THE STUDY The overall objective of the study is to examine the capital budgeting practices being adopted by Indian companies. Specifically this study aims at: (i) Examining the corporate practices regarding the methods of capital budgeting used for evaluating an investment proposal. (ii) Analysing the corporate practices regarding risk techniques of capital budgeting used for adjusting risk in investment proposals. (iii) Evaluating the impact of different factors or variables affecting capital budgeting on the selection of a particular method of capital budgeting technique. HYPOTHESES OF THE STUDY The following null hypotheses were framed and tested: Ho: The size of a company’s capital budget does not affect the selection of capital budgeting technique including risk techniques. Ho1: The education of CEO does not affect the selection of capital budgeting method including risk techniques. Ho2: The age of the company does not affect the selection of capital budgeting method including risk techniques. DATABASE AND RESEARCH METHODOLOGY To identify corporate finance practices in India, a structured questionnaire after pre-testing was served to collect data. All manufacturing companies in India applying capital budgeting techniques comprehend the universe of the study. The size of sample taken for the above study was 100 manufacturing companies covering a broad cross-section of various size-groups, industry–groups, age-groups, ownerships and various geographical areas. These companies covered big cities like Hyderabad,
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No. of Companies 2 9 6 2 11 30

%Age of Companies 6.7 30.0 20.0 6.7 36.6 100.0

Panel B: Industry-wise Classification of Sampled Companies No. of % Age of Companies Companies 1 2 4 1 2 7 5 8 30 3.3 6.7 13.3 3.3 6.7 23.3 16.7 26.7 100.0

VISION—The Journal of Business Perspective Vol. 13 No. 3 July–September 2009

A Survey of Capital Budgeting Practices in Corporate India
Panel C: Age-wise Classification of Sampled Companies Age of Company (In Years) 5-19 20>39 Total No. of Companies 8 6 16 30 % Age of Companies 26.7 20.0 53.3 100.0

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Panel B: Purpose of Investment Formal Capital Budgeting Analysis

Purpose of Investment Expansion into new business/ Diversification only (1) Expansion of existing business only (2) Equipment replacement and modernisation only (3) Expansion into new and existing business (1)+(2) Expansion of existing business and equipment replacement (2)+(3) Expansion into new business and equipment replacement (1)+(3) Expansion into new business, existing business and equipment replacement (1)+(2)+(3) Total
Panel C: Companies’ Discount /Cut off Rate

No. of Companies 0 11 2 2 9 0 6

Panel D: Ownership-wise Classification of Sampled Companies Nature of Ownership Public Private Total No. of Companies 27 3 30 % Age of Companies 90.0 10.0 100.0

Panel E: Educational Status of CEOs Qualifications Undergraduate/Graduate MBA Non MBA Masters > Masters Degree Total No. of Companies 2 8 8 12 30 % Age of Companies 6.7 26.7 26.7 40.0 100.0

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Discount Rate Weighted average Cost of Capital (WACC) Cost of debt Cost of retained earnin Cost of new equity Arbitrary rate Historical Rate of Return Total

The different panels of the table reveal classification of sample on the basis of different criteria. The data thus collected, was analysed by applying mean, mode, summated scores and Chi-square analysis. Chi-square Test was used to test various hypotheses which are indicative of the relationship between two or more variables. RESULTS OF THE STUDY Corporate Practices of Capital Budgeting Table 2 below discusses various aspects of capital budgeting along with the techniques used commonly for investment evaluation.
Table 2: Corporate Practices of Capital Budgeting Panel A: Level of Investment Required For Panel Level of Investment <1million 1-9 million 10-29 million 30-59 million >60 million Total No. of Companies 16 11 3 0 0 30 % Age of Companies 53.3 36.7 10.0 0 0 100.0

No. of Companies 12 14 1 0 0 3 30

% Age of Companies 40.0 46.7 3.3 0.0 0.0 10.0 100.0

Panel D: Most Popular Capital Budgeting Technique

Capital Budgeting Technique Payback Period NPV IRR NPV+IRR Total

No. of Companies 12 12 3 3 30

% Age of Companies 40.0 40.0 10.0 10.0 100.0

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FACTORS 1 2 16.7 (5) 26.7 (8) 0 (0) 26.7 (8) 23.3 (7) 6.7 (2) 3 3.3 (1) 20.0 (6) 3.3 (1) 10 (3) 23.3 (7) 40 (12) RANKS 4 6.7 (2) 16.7 (5) 6.7 (2) 16.7 (5) 16.7 (5) 36.7 (11) 5 43.3 (13) 6.7 (2) 23.3 (7) 10 (3) 16.7 (5) 0 (0) 6 23.3 (7) 0 (0) 60 (18) 0 (0) 0 (0) 16.7 (5) Summated score 130 73 156 71 86 108

Panel E: Factors Deciding Capital Budgeting Method

Finance Theory Experience and Competency Informal Rule of Thumb Importance of the Project Easy Under-standability Top Management Familiarity

6.7 (2) 30 (9) 6.7 (2) 36.7 (11) 20.0 (6) 0 (0)

Note: *Figures in bracket represent the number of companies Panel F: Capital Budgeting Techniques Preferred By Companies Capital Budgeting Method Never [1] NPV IRR Adjusted Present Value Payback Period Discounted Payback Period Profitability Index Accounting Rate of Return 23.3(7) 16.7(5) 56.7(17) 6.7(2) 46.7(14) 36.7 (11) 33.3(10) Rarely [2] 3.3(1) 0 (0) 20.0 (6) 0(0) 6.7(2) 16.7(5) 16.7(5) % Age of Companies Sometimes [3] 10(3) 6.7 (2) 6.7(2) 13.3(4) 23.3(7) 6.7(2) 23.3(7) Often [4] 13.3(4) 20 (6) 13.3(4) 43.3(13) 10(3) 26.7(8) 10(3) Always [5] 50(15) 56.7(17) 3.3(1) 36.7(11) 13.3(4) 13.3(4) 16.7(5) Mode 5 5 1 4 1 1 1

Note: *Figures in bracket represent the number of companies

Level of Investment Required for Formal Capital Budgeting Analysis Perusal of Panel A of Table 2 depicts that all the companies require formal capital budgeting. For 16 respondent companies (53.3%) the minimum cut off level of investment in a project required for formal capital budgeting analysis was less than rupees 1 million while for 11 companies (36.7%) it varied between 1-9 million. Only three companies mentioned rupees 30-59 million as minimum cut off investment level in a project. No company considered greater than 30 million as minimum investment level for doing formal capital budgeting analysis. Thus in the current era of cutthroat competition, even for projects involving small investment outlays, the companies go in for adoption of formal capital budgeting analysis so as to avoid any mistakes resulting in losses. Purpose of Making Investment Panel B of Table 2 reveals that the dominant motivation for making investment is the expansion of existing business.
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Expansion of new business, equipment replacement and modernisation are the other motivators for investment. The results in this study contradict the earlier studies which show replacement, modernisation and diversification as the most popular modes of investment by Indian and foreign companies (Jain and Kumar, 1998 and Stanley Block, 1997). Determination of Cut Off Point or Discount Rate The companies have to decide appropriate discount rate to provide financial justification to the capital project. However the consideration of risk and the need to earn sufficient return on investment make the choice complicated. Therefore, the choice of the best discount rate varied substantially among the financial managers of different companies. Panel C of Table 2 indicates that fourteen (46.7%) respondent companies mentioned cost of debt as the best discount rate followed by the weighted average cost of capital preferred by 12 companies (40%). Historical rate of return and cost
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of retained earnings were mentioned by three and one company respectively. Most Popular Method The survey further reveals that majority of the Finance Managers/Director (Finance) of the respondent companies considered Payback Period Method and NPV method (12 companies each) as the most popular capital budgeting techniques. Three companies consider IRR and an equal number considered both IRR and NPV as popular capital budgeting techniques. Thus payback period, NPV and IRR were three most popular capital budgeting techniques as revealed by Panel D of Table 2 .The companies’ favoured Payback Period Method because of its simplicity. The lack of willingness to adopt the advanced discounted cash flow techniques, in certain small companies explains the non-use of sophisticated discounted flow methods. Usage of Multiple Capital Budgeting Techniques When asked about usage of multiple capital budgeting methods, 27 companies (90%) said that they were using more than one capital budgeting technique for evaluating their investment proposals. Only 3 companies said that they relied on single method for evaluation of investment proposals. These results are consistent with the results of Petry (1975), which depicted that 74 percent of the companies studied were using more than one method for evaluating investment proposals. Role of Education and Experience The survey reveals that experience and education of the finance personnel play an important role in selection of the capital budgeting techniques. Most finance managers of the respondent companies believe that companies with more educated and highly qualified personnel preferred more sophisticated techniques like NPV, IRR whereas the non-discounted techniques like payback period criterion were preferred by the less qualified ones. Consideration of Factors for Deciding Capital Budgeting Method Factors considered for deciding capital budgeting method by the respondents are shown in Panel E of Table 2. The Panel shows that 11 companies regarded importance of the project as the most important factor for selecting method of capital budgeting while 8 regarded it as the second most important factor while selecting the capital

budgeting technique to be used. This was followed by experience and competency, which was considered by 9 companies as the most important and by 8 as the second most important factor. Easy understandability of the method was considered the most important factor by 6 companies though different companies gave it varied ranks. The familiarity of top management with the method is not given topmost priority by any company. The remaining two factors, i.e. Finance Theory and Informal Rule of Thumb, are considered least important by the companies in deciding the capital budgeting method. Preference for Different Capital Budgeting Techniques Previous studies indicate that IRR and payback period methods are the primary methods for evaluation (Pandey, 1989 and Gitman, 1977). In our analysis, we also asked whether firms used all the seven important methods of capital budgeting and how frequently they used these methods on a scale of 1 to 5. Panel F of Table 2 shows that IRR and NPV are the two most preferred methods of capital budgeting where IRR is being preferred as ‘always’ by 56.7 percent of the selected companies and NPV ‘always’ by 50 percent of the companies. Payback Period Method, is next preferred as ‘always’ by nearly 36.7 percent companies and in 43.3 percent companies as ‘often.’Among the rest methods, only Profitability Index is preferred. The use of the other capital budgeting techniques like Adjusted Present Value Method, Discounted Payback Period Method and Accounting Rate of Return Method as revealed by the table is very limited. Thus the results indicate that in the current era of globalisation, majority of the manufacturing companies in India have shifted to the use of discounted capital budgeting techniques. Among these modern methods also, the highly sophisticated ones like IRR, NPV and Profitability Index are preferred more than the less sophisticated ones like Adjusted Present Value or Discounted Payback Period. In practice IRR is thus preferred over NPV. These results are however not in conformity with the theory which considers NPV as a superior method to IRR especially in situations where both give contradictory results. Though, financial management theory recommends NPV as the best method and however, among the traditional ones Payback Period Method is still very popular with the companies. Majority of the companies make use of this method as a supplementary method along with the sophisticated discounted techniques because of its easy understandability and simplicity.
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capital. These field results correspond to the academic theory, which regards WACC to have the superior base level for cost of capital determinations. Calculation of Cost of Equity Capital The Panel B of Table 3 reveals the number of respondent companies estimating cost of equity capital. The Panel shows that out of the 30 respondent companies 18 (60%) make an estimation of Cost of Equity Capital while 12 companies (40%) do not make any such estimation. Perusal of Panel C of Table 3 shows how frequently companies use different methods for calculating Cost of Equity Capital on a scale of 1 to 5. It reveals that out of the 18 companies, which estimate Cost of Capital, none of them prefer any single method for calculating cost of equity capital. The methods of average historical returns on common stock, CAPM model, CAPM model with extra risk factors are being preferred almost equally, either ‘sometimes, ‘often’ or ‘always’ by 9, 10 and 8 companies respectively. The methods of discounted dividend/

Corporate practices regarding Cost of Capital and Cost of Equity Capital Table 3 depicts corporate practices regarding cost of capital and cost of equity capital in detail.
Table 3: Corporate Practices regarding Cost of Capital and Cost of Equity Panel A: Methods Used by Companies to Calculate Cost of Capital Method No. of Companies Percentage of Companies 43.3 6.7 43.3 0.0 6.7 100.0

Weighted Average Cost of 13 Capital Cost of Capital using the 2 CAPM Model Cost of Debt 13 Average Historical Return 0 on Stock Expected Growth Rate Total 2 30

Panel B: Methods Used by Companies to Calculate Cost of Equity Capital
Method to Calculate Cost of Equity Capital Never [1] Average Historical Returns on Common Stock CAPM Model (The “Beta Approach”) CAPM with Some Extra Risk Factors As per the Choice of the Investors Regulatory Decisions Discounted Dividend/earnings Model 50 (9) 44.44 (8) 55.56 (10) 96.7 (17) 61.11 (11) 44.44 (8) Rarely [2] 0 (0) 0 (0) 0 (0) 0 (0) 11.11 (2) 22.22 (4) Percentage Of Companies Some-times [3] 11.1 (2) 0 (0) 0 (0) 0 (0) 0 (0) 5.56 (1) Often [4] 27.78 (5) 50 (9) 38.88 (7) 3.3 (1) 11.11 (2) 11.11 (2) Always [5] 11.11 (2) 3.33 (1) 5.56 (1) 0 (0) 16.67 (3) 16.67 (3) Mode 1 1 1 1 1 1

Note: *Figures in bracket reveal the number of companies

Methods for Calculating Cost of Capital Panel A of Table 3 reveals methods adopted by the respondent companies to calculate the cost of capital. Thirteen companies (43.3%) reported that they use Weighted Average Cost of Capital (WACC) for calculating cost of capital. Cost of Debt is used by 13 companies (43.3%) for calculating the same. Each of the other two methods viz. Cost of Capital using CAPM model and the Expected Growth Rate Method, is being used by very less percentage (6.7 percent) of the companies only. However, none of the companies used the method of Average Historical Return on Stock. The results of the present study are consistent with those by Jog and Srivastava (1995) which found that WACC is used by 47 percent of the Canadian firms for calculating cost of
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earnings model and method of calculating cost of capital by regulatory decisions are the less preferred ones. Corporate Practices Regarding Incorporating Risk in Capital Budgeting The business investments generally have risk associated with their future cash inflows because there are a number of uncertainties associated with the future like changes in demand, changes in government policies, inflation, interest rate changes etc. Increasingly the companies are realising this and making adjustment for different risk factors by adopting various capital budgeting techniques incorporating risk. Table 4 discusses the corporate practices regarding incorporating risk in Capital Budgeting.
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A Survey of Capital Budgeting Practices in Corporate India
Table 4: Corporate Practices Regarding Incorporating Risk in Capital Budgeting Panel A: Type of Risk Involved in Investment Panel Risk Factors % Age of Companies Adjust Adjust discount cash flow rate Risk of unexpected inflation Interest Rate Risk (change in general level of interest rates) Term Structure Risk (change in the longterm vs. short Term interest rate) GDP or Business Cycle Risk Commodity Price Risk Foreign Exchange Risk 46.7 (14) 50 (15) 60 (18) 33.3 (10) 26.6 (8) 20 (6) Both Neither

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Type of Risk Involved in Investment Perusal of Panel A of Table 4 indicates what makes an investment risky according to different companies. It evidently shows that 22 companies considered nonrecoverable investment as the most important factor that makes any investment a risky investment, followed by fluctuations in expected return considered most important by 4 companies. Only three and one companies out of the thirty considered fear of obsolescence and changes in economic, social and political factors respectively as most important risk factor associated with an investment. However, these two factors are considered by 13 companies each, as the third important factor for risk. Risk Factors and their Adjustments The prominent risk factors like risk of unexpected inflation, interest rate, business cycle, commodity price and foreign exchange are generally adjusted by either increasing the discount rate or by reducing the cash flows or by changing both. Panel B of Table 4 reveals how the respondent companies adjust different risk factors. Majority of the companies nearly 28 are making an adjustment for the risk of unexpected inflation and interest rate risk followed by 26 companies making an adjustment for term structure risk. Similarly the Commodity Price Risk and Foreign Exchange Risk are being adjusted by most of the companies that is 25 companies each. It is also noted that majority of the companies (almost greater than 50 percent in each case) are adjusting the discount rate for the Risk of Unexpected Inflation, Interest Rate Risk, Term Structure Risk and Foreign Exchange Risk. In contrast to this for GDP/Business Cycle Risk and Commodity Price Risk, majority of the companies nearly 16 companies (53.3%) each are adjusting the Cash flows rather than adjusting the Discount Rate or both.

13.3 (4) 16.7 (5) 6.7 (2)

6.7 (2) 6.7 (2) 13.3 (4)

10 (3) 23.3 (7) 53.3 (16)

53.3 (16) 53.3 (16) 16.7 (5)

6.7 (2) 6.7 (2) 13.3 (4)

30 (9) 16.7 (5) 16.7 (5)

B: Adjustments for Risk Factors Type of Risk 1 Fluctuations in Expected Return Non-recoverable Investment Changes in Economic, Social and Political Factors Fear of Obsolescence 13.3 (4) 73.3 (22) 3.3 (1) 2 36.7 (11) 13.3 (4) 26.7 (8) Ranks 3 10 (3) 3.3 (1) 43.3 (13) 4 40 (12) 10 (3) 26.7 (8) Summated Score 83 45 88

10 (3)

23.3 (7)

43.3 (13)

23.3 (7)

84

Note: *Figures in bracket represent the number of companies Panel C: Method of Incorporating Risk
Capital Budgeting Method Sensitivity Analysis Value at Risk or other Simulation Analysis Incorporation of Real Options of a Project while its Evaluation CAPM High Cut off Rates Shorter Pay Back Period Never 13.3 (4)

Rarely (0) 26.7 (8) 13.3 (4) 16.7 (5) 23.3 (7) 3.3 (1)

Some-times 13.3 (4) 6.7 (2) 13.3 (4) 10 (3) 33.3 (10) 26.7 (8)

Often 36.7 (11) 6.7 (2) 6.7 (2) 20 (6) 16.7 (5) 23.3 (7)

Always 36.7 (11) 13.3 (4) 10 (3) 16.7 (5) (0) 26.7 (8)

46.7 (14) 56.7 (17) 36.7 (11) 26.7 (8) 20 (6)

Note: *Figures in bracket represent the number of companies

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concluded Sensitivity Analysis to be the most preferred technique for incorporating risk. Shorter Payback Period is the second most preferred method for incorporating risk followed by High Cut off Rates method. CAPM method and Simulation method are the less preferred methods. Testing of Hypothesis Table 5 tests different hypotheses formulated above. It shows the impact of different variables like size of capital budget, CEO education and age of company on the choice of the capital budgeting technique.

Methods for Incorporating Risk Panel C of Table 4 reveals the methods through which companies incorporate risk in capital budgeting decisions. It shows that Sensitivity Analysis is the method preferred by majority of the companies for incorporating risk. Nearly 11 of the sampled companies revealed that they ‘always’ prefer this method for incorporating risk and in total 26 companies are making use of this technique in one way or the other. The results are consistent with those of Bhattacharya (1979) and Ken Leonore and U. Rao Cherukuri (1991) Jain and Kumar (1998), who have

Panel A: Relationship between Size of Capital Budget and Capital Budgeting Techniques Size of Capital Budget (in Rs.) Less than 10 Million 10-99 Million 100-499 Million 500-999 Million More than 1 billion Total IRR Less Than 10 Million (19.430) 10-99 Million 100-499 Million 500-999 Million More than I Billion Total Adjusted Present Less than 10Million Value Method 10-99 Million (24.179) 100-499 Million 500-999 Million More than 1 billion Total Pay Back Period Less than 10 Million (17.205) 10-99 Million 100-499 Million 500-999 Million More than 1 billion Total Discounted* Payback Less than 10 Million Period 10-99 Million (34.877) 100-499 Million 500-999 Million More than billion Total Profitability Index Less than 10 Million (23.099) 10-99 Million 100-499 Million 500-999 Million More than 1 billion Total ARR Less than 10 million (21.189) 10-99 million 100-499 million 500-999 million More than 1 billion Total Note: *Significant at 5% level of significance. Capital Budgeting Tool (Chi Square Value) NPV* (31.085) Never – 44.4% 50% – – 23.3% – 22.2% 50% – – 16.7% – 66.7% 83.3% 50% 45.5% 56.7% – – 16.7% – 9.1% 6.7% – 55.6% 66.7% 50% 36.4% 46.7% – 44.4% 50% 50% 27.3% 36.7% – 33.3% 50% 50% 27.3% 33.3% Rarely – – – 50% – 3.3% – – – – – – – 11.1% – 50% 36.4% 20% – – – – – – 11.1% – 50% – 6.7% – 22.2% 16.7% 50% 9.1% 16.7% – 11.1% 33.3% 50% 9.1% 16.7% Sometimes – 11.1% – – 18.2 10% – 33.3% – 50% 18.2% 6.7% – 11.1% – – 9.1% 6.7% – 33.3% – 50% – 13.3% – 11.1% – – 54.5% 23.3% – – – – 18.2% 6.7% – 11.1% – – 54.5% 23.3% Often – 22.2% – 50% 9.1 13.3% – 44.4% 50% 50% 9.1% 20% 50% 11.1% 16.7% – 9.1% 13.3% – 44.4% 16.7% 50% 63.6% 43.3% – 22.2% – – 9.1% 10% – 22.2% 16.7% – 45.1% 26.7% 50.0% 11.1% – – – 10% Always 100% 22.2% 50% – 72.7% 50% 100% 66.7% 42.9% – 72.7% 56.7% 50% – – – – 3.3% 100% 22.2% 66.7% – 27.3% 36.7% 100% – 33.3% – – 13.3% 100% 11.1% 16.7% – – 13.3% 50% 33.3% 16.7% – 9.1% 16.7%

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Panel B: Relationship between Size of Capital Budget and Capital Budgeting Techniques Incorporating Risk Capital Budgeting Tool (Chi Square Value) Sensitivity Analysis (14.122) Size of Capital Budget (in Rs.) Less than 10 million 10-99 million 100-499 million 500-999 million More than 1 billion Total Less than 10 Million 10-99 Million 100-499 Million 500-999 Million More than 1 billion Total Less Than 10 Million 10-99 Million 100-499 Million 500-999 Million More than I Billion Total Less than 10 Million 10-99 Million 100-499 Million 500-999 Million More than 1 billion Total Less than 10 Million 10-99 Million 100-499 Million 500-999 Million More than 1 billion Total Never Rarely Sometimes Often

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Always

– 11.1% 16.7% 50% 9.1% 13.3% – 44.4% 100% 50% 27.3% 46.7% – 66.7% 83.3% 50% 45.5% 56.7% 50% 77.8% – 50% 18.2% 36.7% 50% 33.3% – 50% 27.3% 26.7% 50% 33.3% 16.7% – 9.1% 20%

– – – – – – – 11.1% – 50% 54.5% 26.7% – – – – 36.4% 13.3% – 11.1% 33.3% – 18.2% 16.7% – 11.1% 16.7% – 45.5% 23.3% – 11.1% – – – 3.3%

– 11.1% 16.7% – 18.2% 13.3% – – – – 18.2% 6.7% – 11.1% – 50% 18.2% 13.3% – – 16.7% 50% 9.1% 10% – 33.3% 50% 50% 27.3% 33.3% – 22.2% 16.7% – 45.5% 26.7%

– 55.6% – – 54.5% 36.7% 50% 11.1% – – – 6.7% – 11.1% 16.7% – – 6.7% 50% – 16.7% – 27.3% 20% 50% 22.2% 33.3% – – 16.7% 50% 22.2% 33.3 % – 18.2% 23.3%

100% 22.2% 66.7% 50% 18.2% 36.7% 50% 33.3% – – – 13.3% 100% 11.1% – – – 10% – 11.1% 16.7% – 27.3% 16.7% – – – – – – – 11.1% 33.3% 100% 27.3% 26.7%

Simulation Analysis* (29.927)

Real Options* (32.802)

CAPM Analysis ( 19.492)

High Cut Off Rates (12.620)

Shorter Period (14.884)

Payback Less than 10 Million 10-99 Million 100-499 Million 500-999 Million More than billion Total

Note: *Chi Square significant at 5% level of significance

Relationship between Size of Capital Budget and Capital Budgeting Technique Panel A of Table 5 reveals that only in case of NPV method and Discounted Payback Period Method, the Pearson Chi-square test of independence was significant at 5% level. This indicates a significant relationship between size of capital budget and these two methods. In case of NPV method, it was discovered that the use

of the method increased with the increase in size of capital budget. Larger companies were making more extensive use of NPV method as compared to the smaller companies. However, the reverse was observed in case of Discounted Payback Period Method. The use of the method decreased with the increase in size of company’s capital budget and the smaller companies were making more use of this method as compared
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Capital Budgeting Tool (Chi Square value) CEO Education Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Never 100% 25% 12.5% 16.7% 23.3% 100% 12.5% 12.5% 8.3% 16.7% 100% 75% 50% 41.7% 56.7% – 12.5% 8.3% 6.7% 100% 62.5% 25% 41.7% 46.7% 100% 50% 12.5% 33.3% 36.7% 50% 12.5% 33.3% 33.3% Rarely – – – 8.3% 3.3% – – – – – – – 50% 16.7% 20% – – – – – – 16.7% 6.7% – – 12.5% 33.3% 16.7% 12.5% 25% 16.7% 16.7% Sometimes – 12.5% – 16.7% 10% – – – 16.7% 6.7% – – – 16.7% 6.7% 100% – – 16.7% 13.3% – – 62.5% 16.7% 23.3% – – 12.5% 8.3% 6.7% – 50% 25% 23.3% Often – 25% – 16.7% 13.3% – 37.5% 12.5% 16.7% 20% – 25% – 16.7% 13.3% – 50% 75% 25% 43.3% – 12.5% 12.5% 8.3% 10% – 37.5% 50% 8.3% 26.7% – 12.5% – 16.7% 10% Always – 37.5% 87.5% 41.7% 50% – 50% 75% 58.3% 56.7% – – – 8.3% 3.3% – 37.5% 25% 50% 36.7% – 25% 16.7% 13.3% – 12.5% 12.5% 16.7% 13.3% 100% 12.5% 12.5% 8.3% 16.7%

Panel C: Relationship between CEO Education and Capital Budgeting Techniques

NPV (14.679)

IRR (15.593)

APV (14.093)

Pay Back period ∗ (9.969)

Discounted Payback (15.923)

Profitability Index (13.168)

ARR (19.869)

Note: *Chi square significant at 5% level of significance.

to the large ones. In case of rest of the five methods, the Pearson Chi-square showed an insignificant relationship. This indicates that except for the above mentioned two methods, no association was found between the size of capital budget and the rest of the capital budgeting methods (IRR, APV, Payback Period, Profitability Index and ARR). As far as the risk techniques of capital budgeting are concerned, Panel B of Table 5 shows that only Simulation Analysis and Real Options have a significant association
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with the size at 5% significance level. All the other methods do not show any significant association with the size of capital budget. Relationship between CEO Education and Methods of Capital Budgeting Panel C of Table 5 depicts as to whether there exists significant association between education of CEO and different methods of capital budgeting. Perusal of Panel C shows that the value of Chi-square is insignificant for
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A Survey of Capital Budgeting Practices in Corporate India
Panel D: Relationship between CEO Education and Capital Budgeting Techniques Incorporating Risk Capital Budgeting Tool (Chi Square value) Sensitivity Analysis ( 13.693) CEO Education Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Undergraduate /Graduate MBA Non MBA masters > Masters degree Total Never – 25% 12.5% 8.3% 13.3% – 75% 25% 50% 46.7% 100% 75% 37.5% 50% 56.7% 100% 37.5% – 50% 36.7% –25% 25% 33.3% 26.7% 100% –25% 16.7% 20% Rarely – – – – – – 12.5% 62.5% 16.7% 26.7% –– 50% – 13.3% –25% 37.5% – 16.7% –12.5% 50% 16.7% 23.3% –––8.3% 3.3% Sometimes – – 12.5% 25% 13.3% – – – 16.7% 6.7% –– – 33.3% 13.3% –– – 25% 10% –37.5% 25% 41.7% 33.3% –– 25% 50% 16.7% 26.7% Often 100% 37.5% 62.5% 8.3% 36.7% – 12.5% – 8.3% 6.7% –25% – – 6.7% –25% 37.5% 8.3% 20% 100% 25% –8.3% 16.7% –50% 25% 8.3% 23.3%

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Always – 37.5% 12.5% 58.3% 36.7% 100% – 12.5% 8.3% 13.3% –– 12.5% 16.7% 10% –12.5% 25% 16.7% 16.7% ––––––25% –50% 26.7%

Simulation Analysis* (25.268)

Real Options* (25.833)

CAPM Analysis ( 18.246)

High Cut Off Rates (15.911)

Shorter Payback Period* (21.488)

Note: *Chi Square significant at 5% level of significance

all the methods of capital budgeting except the Payback Period Method. This shows that only in case of Payback Method, there is significant association between the two variables. The use of Payback Period Method is observed to increase with improvement in CEO education and qualifications. Thus the highly qualified CEOs are making more use of the method as compared to the less qualified ones. For all other methods, the relation was found to be insignificant depicting no association between these methods (NPV, IRR, APV, Discounted Payback Period, Profitability Index and ARR) and the CEO education. Panel D of Table 5 reveals that in case of risk techniques, only Simulation Analysis and Real Options showed significant association with CEO education at

5% significance level and all the other techniques showed no association Relationship between Age of Company and Capital Budgeting Technique Panel E of Table 5 shows the relationship between age of the company and capital budgeting tools. Perusal of this Panel shows that at 5% level of significance except in case of the Payback Period Method, for all other methods of capital budgeting no significant association was found between the methods and age. This shows that only in case of Payback Period Method, Chi Square is significant revealing association between the method and age of the company. It was observed that older the company, lesser is its preference for this method while
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Age of Company 5-19 20-39 >39 Total 5-19 20-39 >39 Total 5-19 20-39 >39 Total 5-19 20-39 >39 Total Never 50% 33.3% 6.3% 23.3% 50% – 6.3% 16.7% 87.5% 66.7% 37.5% 56.7% 12.5% 16.7% – 6.7% 87.5% 33.3% 31.3% 46.7% 62.5% 33.3% 25% 36.7% 12.5% 66.7% 31.3% 33.3% Rarely – – 6.3% 3.3% – – – – – – 37.5% 20% – – – – – – 12.5% 6.7% 25% – 18.8% 16.7% 25% – 18.8% 16.7% Sometimes 12.5% – 12.5% 10% 12.5% – 6.3% 6.7% – 16.7% 6.3% 6.7% 25% – 12.5% 13.3% – 16.7% 37.5% 23.3% – 16.7% 6.3% 6.7% 25% – 31.3% 23.3% Often – – 25% 13.3% – 16.7% 31.3% 20% 12.5% – 18.8% 13.3% – 33.3% 68.8% 43.3% 12.5% 16.7% 6.3% 10% – 33.3% 37.5% 26.7% – 16.7% 12.5% 10% Always 37.5% 66.7% 50% 50% 37.5% 83.3% 56.3% 56.7% – 16.7% – 3.3% 62.5% 50% 18.8% 36.7% – 33.3% 12.5% 13.3% 12.5% 16.7% 12.5% 13.3% 37.5% 16.7% 6.3% 16.7%

Panel E: Relationship between Age of Company and Capital Budgeting Techniques Capital Budgeting Tool (Chi Square Value) NPV (10.405)

IRR (12.105)

APV (14.32)

Pay Back Period * (13.13)

Discounted Payback Period 5-19 Method 20-39 (2.42) >39 Total Profitability Index (7.881) 5-19 20-39 >39 Total 5-19 20-39 >39 Total

ARR (10.568)

Note: *Chi Square significant at 5% level of significance.

the younger companies are making more use of this method. Panel F of Table 5 above reveals that in case of risk techniques, only Sensitivity Analysis and Simulation Analysis showed significant association with age of company at 5% level of significance. All the other techniques showed insignificant relation. CONCLUSION The survey reveals that with the advent of globalisation and mounting competition among manufacturing companies, these companies are paying increasingly greater emphasis on making sound investment decisions.
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Even for projects involving small investment outlays, majority of the companies go in for adoption of formal capital budgeting analysis so as to avoid any mistakes resulting in losses. Moreover, instead of relying on one single technique of evaluation, multiple techniques are applied for evaluation of investments. There is change in trend towards increased adoption of sophisticated discounted capital budgeting practices like NPV, IRR as compared to the non-discounted capital budgeting techniques. However, among the traditional techniques, Payback Period Method is still preferred in majority of companies as a supplement to the DCF techniques. Majority of the companies in India, use the Weighted Average Cost of Capital (WACC) to calculate the Cost of Capital, which is used as a discount or cut off rate
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A Survey of Capital Budgeting Practices in Corporate India
Panel F: Relationship between Age of Company and Capital Budgeting Techniques Incorporating Risk Capital Budgeting Tool (Chi Square Value) Sensitivity Analysis* (13.224) Simulation Analysis* (16.54) Age of Company 5-19 20-39 >39 Total 5-19 20-39 >39 Total 5-19 20-39 >39 Total 5-19 20-39 >39 Total 5-19 20-39 >39 Total 5-19 20-39 >39 Total Never 25% – 12.5% 13.3% 50% 66.7% 37.5% 46.7% 75% 66.7% 43.8% 56.7% 37.5% 33.3% 37.5% 36.7% 12.5% 33.3% 31.3% 26.7% 50% 16.7% 6.3% 20% Rarely 37.5% – – – – – 50% 26.7% – – 25% 13.3% 12.5% 33.3% 12.5% 16.7% 25% – 31.3% 23.3% – – 6.3% 3.3% Sometimes 25% – 6.3% 13.3% 12.5% 16.7% – 6.7% 12.5% 16.7% 12.5% 13.3% – – 18.8% 10% 25% 50% 31.3% 33.3% 25% 16.7% 31.3% 26.7% Often 12.5% 9.1% 50% 36.7% – 16.7% 6.3% 6.7% – – 12.5% 6.7% 12.5% 16.7% 25% 20% 37.5% 16.7% 6.3% 16.7% 12.5% 50% 18.8% 23.3%

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Always 12.5% 83.3% 31.3% 36.7% 37.5% – 6.3% 13.3% 12.5% 16.7% 6.3% 10% 37.5% 16.7% 6.3% 16.7% – – – – 12.5% 16.7% 37.5% 26.7%

Real Options (6.906)

CAPM Analysis (7.481)

High Cut Off Rates ( 6.48)

Shorter Payback Period (10.286)

Note: * Chi Square significant at 5% level of significance.

in case of companies using the Discounted Cash Flow Techniques. The companies have also realised that in the current unpredictable and turbulent business environment, how important it is to account for various types of risk like risk of unexpected inflation, interest rate risk, commodity price risk, foreign exchange risk etc while evaluating investment proposals. For the purpose of incorporating risk in investment decision, companies tend to adopt advanced risk techniques like ‘Sensitivity’ analysis along with the traditional supplements like ‘Shorter Payback Period,’ ‘High Cut off rates’ etc. Various foreign and Indian studies on capital budgeting have revealed that the size of firm significantly affects the practice of corporate finance. For example, majority of the studies reveal that large companies were much more likely to use Net Present Value technique, while small firms tend to rely on the payback criterion. Our study is also consistent with these previous studies

as a significant association was found between NPV and the size of companies. The use of NPV increased with the increase in scale of companies, confirming the belief that larger companies make more use of NPV but payback period was preferred as a supplementary method by most of the companies irrespective of their size. However, except for NPV, Discounted Payback Period, and risk techniques of Simulation and Real options, no significant association was found between the size of capital budget and the capital budgeting methods adopted by the same. It was also revealed that leaving apart Payback Period Method and certain risk techniques like Simulation and Real options, no significant relation could be established between the CEO education and the capital budgeting techniques. In fact, it was observed that Payback Period Method was preferred more by the young companies and highly qualified CEOs. Similarly, no significant association could be determined between the age of the company
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Jain, P.K. and Manoj Kumar (1998), “Comparative Capital Budgeting Practices: The Indian Context,” Management and Change, (January-June), pp. 151-171. Jog, Vijay and Ashwani K., Srivastava (1995), “Capital Budgeting Practices in Corporate Canada,” Financial Practices and Education, 5.3, pp. 387-97. Ken. Leonore R. and U., Rao Cherukuri (1991), “Current Practices in Capital Budgeting: Cost of Capital and Risk Adjustment,” ASCI Journal of Management, 21.1, pp. 26-44. Kester, George W. and Chang, Rosita P., Echanis, Haikal, Isa Md, Skully, Tsui, Wa (1999), “Capital Budgeting Practices in the Asia-Pacific Region: Australia, Hong Kong, Indonesia, Malaysia, Philippines, and Singapore,” Financial Practice and Education, 9.1, pp. 25-33. Mao, James. C.T. (1970), “Survey of Capital Budgeting: Theory and Practice,” Journal of Finance, 25.2, pp. 349-60. Martin Holmen (2005), “Capital Budgeting and Political Risk: Empirical Evidence,” Unpublished Manuscript, Uppsala University. Pandey, I.M. (1989), “Capital Budgeting Practices of Indian Companies,” MDI Management Journal, 2.1, pp. 1-15. Patricia A., Ryan, Glenn P., Ryan (2002), “Capital Budgeting Practices of the Fortune 1000: How Have Things Changed?” Journal of Business and Management, 8.4, pp. 355-64. Petty, J., William, Scott David F., and Bird Monroe M. (1975), “The Capital Expenditure Decision Making Process of large Corporations,” The Engineering Economist (Spring 1975), 20.3, pp. 159-172. Pike, Richard (1996), “A Longitudinal Survey on Capital Budgeting Practices,” Journal of Business Finance and Accounting, 23.1, pp. 79-92. Porwal, L.S. (1976), Capital Budgeting in India, Sultan Chand and Sons, New Delhi. Schall, Lawrence D., Sundem, Gary. L., and Geijsbeek, William.R., Jr. (1978), “Survey and Analysis of Capital Budgeting Methods,” The Journal of Finance, 33.1, pp. 281-87. Shimin, Chen (1995), “An Empirical Examination of Capital Budgeting Techniques,” The Engineering Economist, 40.3, pp. 220-32. Stanley, Block (1997), “Capital Budgeting Techniques Used by Small Business Firms in the 1990s,” Engineering Economist, 42.4, pp. 289-97. Stanley, Marjorie T., and Block, Stanley B. (1984), “A Survey of Multinational Capital Budgeting,” The Financial Review, 19.1, pp. 36-54. Tamilnani, B. (2004), “A Study on Capital Budgeting Practices in Cooperative Spinning Mills in Tamil Nadu,” Finance India, 18.2 (June), pp. 941-946. Trahan, E.A., and Gitman, L.J. (1995), “Bridging the Theory Practice Gap in Corporate Finance: A Survey of Chief Financial Officers,” Quarterly Review of Economics and Finance, 35, pp. 73-87.

and the method used except in case of payback period, Sensitivity and Simulation Analysis capital budgeting techniques. Therefore, it can be concluded that Capital Budgeting Practices in manufacturing companies of India have undergone a drastic change in the current times. The companies have moved from the traditional non-discounted techniques towards adoption of the sophisticated discounted cash flow techniques. However, companies ought to give due consideration to the size of capital budget and nature of the company in selecting the method of capital budgeting. Wherever the budget is large or the nature of industry demands, more sophisticated discounted techniques should be used. REFERENCES
Anand, Manoj (2002), “Corporate Finance Practices in India: A Survey,” Vikalpa, 2.4, pp. 29-51. Babu C. Prabhakara and Aradhana Sharma, (1995), “Capital Budgeting Practices in Indian Industry–An Empirical Study,” ASCI Journal of Management, 25.1, pp. 34-43. Bierman, Harold J. (1993), “Capital Budgeting in 1992: A Survey,” Financial Management, 22.3, p. 24. Chadwell-Hatfield, Patricia; Goitein, Bernard; Horvath,Philip and Webster, Allen (1997), “Financial Criteria, Capital Budgeting Techniques, and Risk Analysis of Manufacturing Firms,” Journal of Applied Business Research,13.1, pp. 95-104. Cherukuri, U. Rao, (1996), “Capital Budgeting Practices: A Comparative Study of India and Select South East Asian Countries,” ASCI Journal of Management, 25.2, pp. 30-46. Dhanker, Raj S. (1995), “An Appraisal of Capital Budgeting Decision Mechanism in Indian Corporates,” Management Review, (July-December), pp. 22-34. Drury, C; Braund, S. and Tayles, M. (1993), “A Survey of Management Accounting Practices in UK Manufacturing Companies,” ACCA Research Paper, 32, Chartered Association of Certified Accountants. Gitman, Lawrence J., and Forrester John R., Jr, (1977), “A Survey of Capital Budgeting Techniques Used by Major US Firms,” Financial Management, 6.3, pp. 66-71. Gitman, L.J., and Vandenburg, P. (2000), “Cost of Capital Techniques Used by Major US Firms: 1997 vs 1980,” Financial Practice and Educationt, 10.2, pp. 53-68. Graham, John R. and Harvey Campbell R. (2000), “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics, 60.2/3, pp. 1187-243. Graham, John R. and Harvey, Campbell R. (2002), “How Do CFOs Make Capital Budgeting and Capital Structure Decisions?” The Journal of Applied Corporate Finance, 15.1, pp. 8-23.

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Satish Verma (sv_gndu@yahoo.co.in) is a Professor in the Department of Economics, Guru Nanak Dev University, Amritsar. He was Head of the Department of Economics in the university from 1997-2000 and thereafter Dean of the Faculty of Economics and Business during 1998-2000. He has published 35 articles in refereed Journals of National and International repute. He has been organising number of conferences and seminars, notably as Local Organising Secretary of the annual conference of the Indian Economic Association (1999) and of the Association of Indian Universities’ Workshop on Internationalisation of Higher Education. Sanjeev Gupta (sanjeevguptaeco@gmail.com) is a Faculty of Management in the Department of Humanities and Management at Dr. B.R. Ambedkar National Institute of Technology, Jalandhar. He has Ph.D in Economics and PGDOR. He has teaching and research experience of 14 years. He has to his credit papers published in national and international journals. His research interest includes forecasting techniques, time series econometrics and survey research quantitative as well qualitative. He is an expert in multivariate statistical tools and applied econometrics. Roopali Batra (roopalibatra@rediffmail.com) is a Faculty in Management at Apeejay Institute of Management, Jalandhar. She is M.Phil in Management and is currently pursuing her Ph.D in the area of Capital Budgeting. She has teaching and research experience of six years. She has to her credit several research papers in reputed national referred journals including Productivity, ICFAI Journal of Applied Finance, ICFAI Journal of Management Research etc. Her research interest includes Capital Budgeting, Stock Market and Balanced Scorecard.

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