Table of Contents

Contents
Table of Contents........................................................................................................................................1
1.1 Background of the Study.......................................................................................................................1
1.2 Statement of the Problem.......................................................................................................................2
1.3 Objectives of the Study..........................................................................................................................2
2. Review of Related Literature...................................................................................................................3
2.1 Theoretical Reviews..........................................................................................................................3
2.2 Significance of Capital Budgeting.....................................................................................................3
2.3 Capital Budgeting Decision Process..................................................................................................3
3. Research Methodology............................................................................................................................3
3.1 Research Design................................................................................................................................3
3.2 Research Approaches.........................................................................................................................3
3.3 Source of Data...................................................................................................................................4
3.4 Data Analysis Method.......................................................................................................................4
4. Summary of Findings, Conclusions & Recommendations.......................................................................4
4.1 Summary of Findings........................................................................................................................4
4.2 Conclusion.........................................................................................................................................4
4.3 Recommendations.............................................................................................................................4
References...................................................................................................................................................5
1.1 Background of the Study
Firms operate in dynamic environments, necessitating strategic decision-making to allocate
resources effectively. Capital budgeting, as a subset of financial management, plays a pivotal
role in shaping a company's future. The allocation of funds to various assets is a critical task, and
these investments significantly impact a firm's cash flows, profitability, and overall success.
Capital budgeting involves evaluating potential projects, estimating future cash flows, and
considering uncertainties associated with these cash flows.

Peterson & Fabozzi (2002) emphasize the financial manager's challenge in estimating the impact
of investments on a firm's future cash flows and the need to evaluate the associated uncertainties.
Additionally, Maroyi (2011) highlights the importance of integrating capital budgeting with a
firm's strategic plan to ensure alignment with long-term goals.

Ross, Westerfield & Jaffe (1999) and Anand & Monoj (2002) suggest various techniques for
selecting potential investments, including Net Present Value (NPV), Payback Period (PB),
Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), Profitability Index (PI),
and Discounted Pay Back Period (DPB). Jain & Yadev (2002) note that the choice of techniques
varies across industries, with large corporations often favoring IRR or NPV, or a combination of
both.

Capital budgeting is crucial for several reasons, as highlighted by Du Toit & Plenaar (2005) and
Morgan et al., (2001), cited in Maroyi (2011). It accounts for a significant portion of a firm's
funds, has a fundamental impact on future cash flows, is often irreversible or costly to reverse,
and influences a company's profitability and long-term strategy. Effective capital budgeting is
imperative for making informed decisions and avoiding financial challenges in the future.

The focus of this study is the Ethiopian Construction Design and Supervision Corporation, where
an assessment of capital budgeting practices aims to enhance the effective and efficient use of
funds in its long-term operations.

1.2 Statement of the Problem

Despite the critical role of capital budgeting, it remains a subject of substantial debate and
investigation. Souza & Lunkes (2016) found variations in capital budgeting practices among
companies, with different preferences for techniques such as Payback Period, NPV, and IRR.
Slagmulder, Bruggeman & Wassenhove (1995) argue that traditional accounting-based decision
models may not be adequate for evaluating investments, particularly those involving strategic
and intangible benefits.

Andora, Mohanty & Toth (2015) emphasize the influence of firm size, multinational culture,
goals, and the presence of a code of ethics on capital budgeting practices. The findings of these
studies, conducted primarily in developed countries, lack consistency and often neglect the
specific business culture and strategy of developing countries like Ethiopia.

This study, therefore, seeks to fill this gap by assessing the capital budgeting practices of the
Ethiopian Construction Design and Supervision Corporation, offering insights into a developing
country's unique business context.

1.3 Objectives of the Study

The specific objectives of this research are:

 To assess the capital budgeting techniques practiced by the corporation.

 To investigate how the capital budgeting work process is conducted.
 To assess the post-implementation evaluation work process.
 To assess the challenges of the current capital budgeting process of the corporation.
2. Review of Related Literature
2.1 Theoretical Reviews
Capital budgeting, as a theoretical discipline, involves estimating future benefits, determining the
cost of capital, and basing project approval on whether benefits exceed costs (Kolb, 1968).
Theories emphasize the need for systematic analysis, considering factors beyond a company's
control (Quirin, 1967).

2.2 Significance of Capital Budgeting

Bhalla (2004) highlights the significance of capital budgeting decisions due to their irreversible
nature, long-term impact on profitability, and influence on a firm's competitive position. Large
firms and multinational corporations are more likely to have formal processes and use advanced
techniques like DCF (Andora, Mohanty & Toth, 2015).

2.3 Capital Budgeting Decision Process

Norren, Brewer & Garrison (2011) outline the phases of the capital budgeting decision process,
including planning, evaluation, selection, implementation, control, and auditing. Each phase
involves distinct activities and considerations, emphasizing the need for a comprehensive
approach.
3. Research Methodology
The research design adopts a descriptive approach to provide an accurate portrayal of the capital
budgeting practices at the Ethiopian Construction Design and Supervision Corporation. A mixed
research approach combines structured questionnaires, interviews, and document reviews to
gather both quantitative and qualitative data.

3.1 Research Design

Descriptive research is chosen to depict the current state of capital budgeting practices. It is
suitable for addressing specific issues and obtaining insights into the problem at hand (Kothari,
2004).

3.2 Research Approaches

The mixed research approach combines structured questionnaires for quantitative data and
interviews and document reviews for qualitative insights. This approach ensures a
comprehensive understanding of capital budgeting practices.

3.3 Source of Data

Primary data is collected through structured questionnaires and interviews, while secondary data
is obtained through document reviews. Triangulating data from multiple sources enhances the
reliability and validity of the findings.

3.4 Data Analysis Method

Quantitative data is analyzed using descriptive statistics, including mean, frequency, and
standard deviation, with SPSS software. Qualitative data from interviews and document reviews
are analyzed to provide a holistic view of capital budgeting practices.
4. Summary of Findings, Conclusions & Recommendations
4.1 Summary of Findings
The study reveals that Ethiopian Construction Design and Supervision Corporation primarily
uses the profitability index technique for investment evaluation. The capital budgeting practices
are well-organized, from planning to post-investment evaluation. Challenges include a shortfall
of funds, lack of well-trained staff, and the absence of clearly stipulated guidelines.

4.2 Conclusion
Capital budgeting practices at the corporation align with theoretical foundations, reflecting sound
practices. However, addressing challenges is crucial for improved efficiency and effectiveness.

4.3 Recommendations
 Training: Management should focus on short-term training to address knowledge gaps
among staff.
 Policy Revision: The Corporation should revise its capital budgeting policy to include
detailed guidelines for standardized practices.
 Alignment with Strategic Plan: Reviewing the strategic plan document to provide
clarity on aligning investments with the corporation's strategic objectives is
recommended.
References
Anand, M., & Monoj, M. (2002). Capital budgeting practices in Indian business houses: An
empirical study. Vikalpa, 27(1), 3-12.

Andora, A., Mohanty, P., & Toth, J. (2015). Corporate capital budgeting practices: A
comparative analysis of U.S. and Japanese manufacturing firms. International Journal of
Accounting and Financial Reporting, 5(2), 133-150.

Bhalla, V. K. (2004). Investment management: Security analysis and portfolio management. S.

Chand.

Du Toit, E., & Plenaar, R. (2005). Capital budgeting practices of listed companies in South
Africa. Meditari Accountancy Research, 13(1), 109-130.

Jain, P. K., & Yadev, M. (2002). Capital budgeting practices: A survey of corporate sector in
India. Vikalpa, 27(1), 29-42.

Kolb, R. W. (1968). Modern Capital Theory. McGraw-Hill.

Kothari, C. R. (2004). Research Methodology: Methods and Techniques. New Age International.

Maroyi, A. (2011). Capital budgeting practices: A comparative study of the use of discounted
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Morgan, D. P., Poulsen, A. B., & Wolf, J. G. (2001). The evolution of capital budgeting practices
in large companies: A longitudinal study of AT&T. Managerial and Decision Economics,
22(2), 71-88.

Norren, P. J., Brewer, P. C., & Garrison, R. H. (2011). Managerial Accounting. McGraw-Hill.

Peterson, P. P., & Fabozzi, F. J. (2002). Capital budgeting: Theory and practice. John Wiley &
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Quirin, J. J. (1967). Capital Budgeting in the 1960s. Management Science, 13(12), B683-B701.

Ross, S. A., Westerfield, R. W., & Jaffe, J. (1999). Corporate finance. McGraw-Hill.

Slagmulder, R., Bruggeman, W., & Wassenhove, L. N. V. (1995). A simulation approach for
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Souza, G. C., & Lunkes, R. J. (2016). Capital budgeting practices: A survey in the Brazilian
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