An investigation of capital budgeting techniques on performance: a survey of selected companies in Eldoret Town

Abstract

The study was carried out in selected companies found in Eldoret. The purpose of the study was to investigate the effects of capital budgeting techniques on profitability in selected companies in Eldoret. To meet this purpose specific research objectives include determining the contributions of various capital budgeting methods on profit levels of selected companies. The specific methods include the payback period, net present value, accounting rate of return, profitability index and internal rate of return .The study used a survey design with a targeted population of 110 tope level manager, departmental manager and supervisors of selected Companies found in Eldoret town. It used stratified sampling technique to sample a sample size of 85 which is 78% of the targeted population. Questionnaires and interview schedule was used to collect data from the respondents. Validity and reliability was tested through a pilot study. Descriptive statistics was used to analyze data. The common Capital budgeting techniques used by selected companies in Eldoret town to make Capital decisions were found: net present value, pay pack period and internal rate of return. The indicators of profitability projects in capital budgeting techniques in include: positive net present value, short recouping periods, less risks of failure alongside high average income. The effects of net present value, payback period, and internal rate of return and profitability index on profitability levels include reduction the cost of Capital, increases amount of returns from the project and reduce level of risk of projects as the main levels of profitability. The study therefore recommends the following to be adopted to improve the performance of the company and the profit levels using Capital budgeting techniques, Creation of a separate department to deal with project capital budgeting techniques and identification of suitable projects, Mixing of project capital budgeting techniques of both traditional and modern to enable the business to circumvent the risks of project failure, Listing of projects to be invested in order of priority before sourcing for their funding, Computing the costs of finance for each source of a particular project and compare it with the expected future returns from each project, Provision of enough finance to implement Capital decisions in all organizations and Creating an oversight body to foresee the implementation Training of employees A further study carried out on the following areas to assist beef up the areas not covered by the current study, Evaluation of costs of sources of finance and Capital decisions and Factors influencing the effectiveness of project budgeting.