Capital Budgeting Practices in Nepal: A Survey

Abstract

This study aimed at ascertaining the adequacy of financial resources for capital investment, financial objectives, qualitative factors, capital budgeting techniques, minimum return standard, and method of measuring the risk in the context of Nepalese enterprises. The study was based on questionnaire survey of 65 financial executives conducted in 2006. The study revealed that the majority of respondents did not have adequate resources for investment in fixed investment. The majority of the enterprises had plan to increase their investment in fixed assets. The major type of capital budgeting project was related to expanding plant capacity, followed by adding new product line, undertaking reorganization/modernization program, and undertaking replacement activities. It was observed that DCF methods, which were regarded as theoretically sound methods, did not reveal to be the most preferred methods of capital budgeting evaluation.As regards qualitative factors, the most important factor was legal factors while the least important factors were employee safety and morale. With respect to minimum required rate of return for the accept/reject criterion in capital budgeting evaluation, ‘management determined target rate of return’ was observed to be the most popular one. The weighted average cost of capital did not appear to be the most preferred standard.Concerning the cash flow forecasting methods in capital budgeting, the most preferred method was observed to be management’s subjective estimates. The quantitative methods were used less by Nepalese enterprises while estimating cash flows.The most preferred definition of risk in capital budgeting was observed to be the probability of not achieving target return. The majority of Nepalese respondents did not use any formal risk analysis technique. For those who were using risk analysis technique, the important methods were, shortening the payback period and raising required rate of return.