Challenges and Opportunities in Adopting Capital Budgeting Practices

The traditional application of the net present value method in capital budgeting involves the use of market derived discount rates such as the cost of capital. Justification of these discount rates stems from the separation principle that states that investment decisions can be made independent of shareholders' tastes and preferences. The purpose of this paper is to show that the separation principle does not hold for closely-held firms and small firms, and, accordingly, market-derived discount rates are inappropriate. Two capital budgeting techniques which are appropriate for these firms are presented. Accept/reject decisions for capital budgeting projects are often made using a technique known as “net present value” (NPV).1 Using the NPV method, acceptable projects are those for which the project's cost is less than the present value of the project's cash flows discounted at the firm's cost of capital; in other words, acceptable projects have a positive NPV. The firm's cost of capital is usually taken to be the weighted average of the firm's cost of equity and debt as measured by investor returns in the capital markets. Justification for use of a discount rate, determined by reference to market-wide investor returns, is based on “the separation principle” which asserts that corporations can make capital budgeting decisions independently of their shareholders' views.2 But because a critical assumption of the separation principle is that shares are readily marketable, it is likely that the separation principle and, hence, market-determined discount rates are inappropriate for closely-held firms and small firms.3 In this paper, we discuss two capital budgeting approaches which are applicable to firms whose shares are not readily marketable. This paper is divided into five sections. First, we discuss the traditional net present value approach to capital budgeting and, then, we indicate in detail, why it may not be suitable for use by closely-held firms and small firms. In the third and fourth sections, we explain two capital budgeting techniques which may be appropriate for use by these firms. Finally, we summarize our conclusions.

Purpose– The purpose of this paper is to investigate the individual mechanisms that mediate the relationship between marketing practices and growth-quality of work life ambidexterity.Design/methodology/approach– Data were collected from small service firms via an online survey questionnaire electronically distributed to 7,271 owners of small firms in Australia. Partial least squares was used to test our mediation hypotheses on the data obtained.Findings– The authors demonstrate the mediation effect of entrepreneurial self-efficacy and passion for work in enhancing the relationship between marketing practices and growth-quality of work life ambidexterity.Practical implications– The findings indicate that being good at marketing does not always lead directly to achieving growth-quality of work life ambidexterity. The results suggest that achievement in both domains requires owners of small service firms to have a strong self-belief that they can perform their job successfully (entrepreneurial self-efficacy) as well as a strong passion to do the job they are doing (passion for work). Policy makers or small firm advisors can include this information to develop enactive mastery measures to promote efficacy and passion for work which can increase small firm survival rates.Originality/value– The high percentage of business terminations reported without financial loss underscores the importance of including both financial and non-financial goals for small firms. The approach to conceptualize and operationalize growth-quality of work life ambidexterity as a dependent variable representing firm performance assists by providing a more detailed and practical understanding of the organizational and individual variables that enable small firms to realize both.

The paper studies the transactional and transformational styles of leadership and established the effective style that influences organizational effectiveness. It aimed at exploring and elaborating the styles of leadership (Transactional and Transformational) for managing small and medium firms in Manipur during Covid 19 pandemic. The study adopts survey and interview techniques and 98 employees from 25 small and medium firms in Manipur, India are considered as sample. The data are analysed using ordinal regression and the spearman correlation coefficient. It has been found that 55% of leadership effectiveness is subject to exhibition of either transactional or transformational leadership style. It has been found that leadership effectiveness is increased by 2.213 for every unit increase in transformational leadership style. On the other hand for every unit increase in transactional leadership style, effectiveness increased by 1.329. The result shows that transformational leadership style is more effective than transactional style in managing the Small and Medium firms in Manipur
 This study is an attempt to determine effective leadership style whether transactional or transformational for managing small and medium firms in Manipur during Covid 19 pandemic. A sample of 98 employees from small and medium firms in Manipur was taken for the research using Multifactor Leadership Questionnaire MLQ (Form 5x-Short). The data were analysed using ordinal regression and the spearman correlation coefficient. It has been found that 55% of leadership effectiveness is subject to exhibition of either transactional or transformational leadership style. The study highlighted that leadership effectiveness is increased by 2.213 for every unit increase in transformational leadership style as compare to transactional style. However, for every unit increase in transactional leadership style, leadership effectiveness increased by 1.329. The above comparison shows that transformational leadership style is more effective than transactional leadership style in Small and Medium firms in Manipur. This study is an attempt to determine effective leadership style whether transactional or transformational for managing small and medium firms in Manipur during Covid 19 pandemic. A sample of 98 employees from small and medium firms in Manipur was taken for the research using Multifactor Leadership Questionnaire MLQ (Form 5x-Short). The data were analysed using ordinal regression and the spearman correlation coefficient. It has been found that 55% of leadership effectiveness is subject to exhibition of either transactional or transformational leadership style. The study highlighted that leadership effectiveness is increased by 2.213 for every unit increase in transformational leadership style as compare to transactional style. However, for every unit increase in transactional leadership style, leadership effectiveness increased by 1.329. The above comparison shows that transformational leadership style is more effective than transactional leadership style in Small and Medium firms in Manipur.

This study investigated the impact of investment appraisal techniques on the profitability of small manufacturing firms in the Nelson Mandela Bay area of the Eastern Cape Province, South Africa. Small firms are widely considered important to solving South Africa’s unemployment problems and the rejuvenation of its economy. The study used survey data generated from one hundred and twenty four small manufacturing firms in the Despatch, Uitenhage and Port Elizabeth areas of the Nelson Mandela Bay to analyze their capital budgeting practices. The study ascertained, by statistically testing the hypotheses of the study, that small manufacturing firms’ owners do not use sophisticated investment appraisal techniques when evaluating their proposed projects. A multiple regression analysis was employed to confirm the impact of investment appraisal techniques on the profitability of the small manufacturing firms. The study concluded that the use of non-sophisticated investment appraisal techniques has a negative impact on the profitability of small firms. Recommendations were made to improve the managerial and financial skills of the owners of small manufacturing firms. Key words: Small firms, investment appraisal techniques, profitability.

A number of capital budgeting techniques find place in basic as well as advanced text books on Financial Management and Corporate Finance. Each technique has its pros and cons as a decision making tool. The research paper investigates the decision making practices of Pakistani companies with respect to Capital Budgeting including the techniques employed and basis for estimation of cost of Capital / Project risk. The paper also examines the linkage between the techniques employed and various factors such as; size of investment outlay, nature of industry, company size, growth rate and capital structure. Also probed is the extent of delegation of decision making authority in respect of capital budgeting decisions. Further, the respondents' views on relative popularity/significance of the techniques and reasons for the same have also been studied. Furthermore, the differences in techniques and decision making practices of local and foreign companies operating in Pakistan have also been looked into. The information/data for the above stated purpose was collected through a questionnaire from sample companies listed on the Karachi Stock Exchange (KSE).The main findings extracted from the responses to the questionnaire are, that key decision makers in Pakistani firms are quite aware of and practically using sophisticated capital budgeting techniques. The study shows that bigger size companies give greater preference to IRR, while smaller firms rely more on NPV. Also smaller firms are keener in estimating the pay back period (PP) as compared to larger companies. Consciously or unconsciously the firms relying more on debt financing or with high growth rates give more preference to the NPV technique, while low leverage and low growth firms rely more on IRR.

This study adopts an integrated approach to employee voice (EV) and analyses the impacts of direct and indirect EV mechanisms on firm innovation in small and medium‐sized firms separately. It also proposes a new categorization for direct EV, by distinguishing between verbal and written mechanisms, allowing us to take the level of formality of different EV mechanisms into account. The analysis of 17,890 European firms shows that verbal, written and indirect EV mechanisms are all positively related to a higher propensity of firm innovation in both small and medium firms. However, for verbal EV mechanisms the relationship is significantly stronger for small firms than medium firms. The results also reveal that medium firms derive higher benefit than small firms while combining and balancing EV mechanisms with different levels of formalization (i.e. verbal and indirect voice). However, the former also suffers from excessive formalization of employees’ involvement in the innovation process (e.g. through written and indirect voice). Overall, this study supports recent calls for the need to adopt an integrated, pluralistic approach to EV and has important implications for EV research in small and medium firms.

This study examines capital budgeting processes at the state level in the USA. This research examines the effects of economic decline on changes in capital budgeting practices. The secondary sources of information were analyzed, including data from state web-sites, Bureau of Economic Analysis (BEA) data, and National Association of State Budget Officers (NASBO) reports. Based on these analytical materials, the author choose capital budgeting practices of following states as the examples of the successful use of analytics, data, and performance information: California, Delaware, Georgia, Indiana, Maryland, Massachusetts, Montana, New York, Oregon, and Vermont. The result of this research will improve the knowledge about best practice in capital planning and budgeting and, finally, will contribute to greater efficiency in capital spending within state and without states. This research will expand knowledge of successful use of analytics, data, and performance information in capital budgeting processes across boundaries for practicing planners, developers, budget analytics, debt managers, and policy makers in the areas of regional collaboration, capital planning, and capital budgeting. This study expands knowledge of capital budgeting “best practices” for practicing planners, developers, budget analytics, debt managers, and policy makers in the areas of capital planning, financing, and budgeting.

The purpose of this study is to examine the capital budgeting strategies that are used by foreign subsidiaries of U.S.‐based multinational enterprises. While the results indicated a preference for sophisticated capital budgeting techniques as the primary method of analysis, the actual use of sophisticated capital budgeting techniques by foreign managers may not be as widespread as expected by financial theorists. Although it was found that certain environmental and company‐specific factors influenced the level of sophistication of capital budgeting practices used by U.S. foreign subsidiaries, the associations were small and had only minor explanatory significance. The results showed that foreign subsidiaries exposed to high levels of political and financial risk tended to use sophisticated capital budgeting strategies. Subsidiaries characterized by high levels of financial leverage and high cost of capital requirements also employed advanced capital budgeting strategies. Multinational enterprises (MNEs) have many options available to them in terms of how they manage their foreign subsidiaries. Traditionally, most major policy decisions were made at the parent firm's headquarter office while foreign subsidiaries had few opportunities to influence major corporate decisions. Today, more companies are using a flexible approach which involves setting strategic goals at the home office and allowing local managers to implement their own specific policies. An important question in this study involved determining how effective local foreign managers were in implementing their capital budgeting processes. As U.S.‐based MNEs continue to expand their operations abroad, there is an increased need to examine which financial decision models are actually used by subsidiary managers to deal with the increased complexity of investing in foreign countries. Unlike traditional capital budgeting analysis, international analysis is a considerably more complex process. These complexities occur for a number of reasons including complicated cash flows estimates, changes in foreign exchange rates, different accounting systems, potential for blocked funds, and political risk considerations. These factors are rarely experienced by traditionally domestic U.S. firms. To maintain a competitive edge, MNEs must continue to use the most efficient approaches available to them. This study provides a detailed analysis of the capital budgeting practices that are actually being used by foreign subsidiaries of U.S.‐based MNEs. The paper is organized in the following manner. Section I provides a brief overview of the theoretical and practical issues of international capital budgeting analysis. Section II focuses on the areas of data collection, questionnaire design, and environment‐specific and company‐specific factors. Section III discusses usage of capital budgeting techniques, adjustment and assessment of project risk, and factors influencing capital budgeting policies. The final section presents some findings from this study.

Bootstrap financing methods commonly used as an alternative to access a capital, since the conventional access of capitalis limited for small and medium firms in Indonesia.This study aims to explain the application of bootstrap financing for small and medium-sized firms in getting access to capital. Subjects used in this study are 67 owners of small and medium firms in Surabaya. The method used is descriptive qualitative. The results of this study indicate that for the method loan from the owner, instrument using personal credit card is the most frequent one. On the other hand, for the method funding from family, borrowing from family and friends is the most common instrument.

Investment in stone mining projects is always associated with risks as there might have relatively greater uncertainty of expected level of extraction. This study examines the degree to which firms operating in stone mines are facing risks and obstacles regarding their investment and profit, conditional on the investment climate indicators, ownership structure, and firm’s performance. Studies on investment climate are mainly based on macro level data, and firm level studies are relatively sparse (Dao, 2008; Cull and Xu, 2003; 2005). This sparseness may result from the dearth of micro-level data. This study provides findings that also fill-up this gap in the literature. The analyses are based on data collected in 2010 and 2011 and from 633 small, medium and large stone mining firms from Sylhet Division in Bangladesh. 112 of large firms reported that the source of their initial investment came from either bank loan or remittances or both, while in case of medium firm partnership between mine owners and individual investor who bears the mine digging and extraction costs played the dominant role (73 out of 209). However, 49.49 % of the small firms reported that either usury or microfinance through NGOs were the major source of their initial investment. The estimates obtained from ordered probit and IV-ordered probit models show that most sets of variables have statistically significant impacts on ownership and firm performance. Our findings suggest that factors like credit facilities, red tape captured by delay, regulatory burden, weak infrastructure, illegal payments such as bribe paid to the public officials, and acute labour shortages are responsible for changes in production and cost; and thus in investment climate. As property rights are defined and ownership structures are fully explored, the stone crashing firms are relatively risk free. In case of small and medium firms, firm’s location plays an important role. Experience matters for large firms. With the finding that acute labor shortages is a significant bar to profitable investment climate, large scale labour migration from less developed parts of the country to the mining areas would be one of the best feasible solutions. Bribe or illegal payment made by firms should be mitigated through increasing level of inspections by the administration. Our result accounts for the heterogeneity of firms and may be important for policy makers to develop clear, consistent and unambiguous approaches to fostering a favourable investment climate for firms under consideration especially for small firms.

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE) , SciVerse ScienceDirect (Elsevier) , Informa - Taylor & Francis (CrossRef) , Wiley (CrossRef) , Business (JSTOR) , Arts & Sciences (JSTOR) , Proquest , MEDLINE (NLM) , and Wiley Online Library . Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them. Recent studies lent credence on the use of more sophisticated capital budgeting techniques along with many capital budgeting tools for incorporating risk. Notwithstanding, it drew a distinction between developed and developing countries. Moreover, factors impinging on choice of capital budgeting practice were identified, and bereft of behavioral finance and event study methodological approach were highlighted. More extensive studies are imperative to build robust knowledge of capital budgeting theory and practice in the chaotic environment. This research was well thought out in its design and contributed by stating the known and unknown arena of capital budgeting during the last two decades. This scholarship facilitates to academics, practitioners, policy makers, and stakeholders of the company.

The business case for social responsibility (BCSR) is one of the most widely studied topics in the business and society literature that focuses on large firms. This attention is understandable because large firms have an obligation to shareholders who, as commonly assumed, seek to maximize returns on their investments, in turn, pressing corporate managers to show that firms’ expenditures in social engagement would pay off. Small firms, on the other hand, rarely face such pressures, yet the BCSR logic is increasingly applied to small firms as well. Our primary objective in this paper is to examine whether and how much do small firm owners’ perceptions of BCSR affect the firm’s social engagement. In finding a fine-grained answer to those questions, we consider BCSR as a two-dimensional construct consisting of tangible and intangible benefits, and also integrate the BCSR perspective with the slack resource perspective to offer a motivation-capacity lens to examine firm’s social engagement. Drawing on a multi-industry sample of 478 small firms in the US, we find that while small firm owners’ perceptions about potential tangible benefits of social engagement are not related to the firm’s social engagement, perceptions about potential intangible are positively related. Firm's financial performance is also positively related to its social engagement, but there is no interaction between potential benefits and financial performance. This study contributes to an improved understanding about small firms’ social engagement, which still remains an understudied area. Our results are in line with studies which argue that firms’ social engagement is a response to institutional factors.

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.

Perhaps the most difficult hurdle which companies come across is the selection of the project which is beneficial to the organization in the long-run and also increases the present value of the shareholders. This is where Capital Budgeting comes into play. Capital Budgeting is one of the most important areas of financial management. This paper gives an overview of what capital budgeting is, what different types of techniques comes under capital budgeting and how to represent capital budgeting technique algorithmically. In this paper we also throw some light on what the results of various capital budgeting techniques will be if any banking organization follows these techniques and compare those results. These techniques namely as Payback Period (PP), Average Rate of Return (ARR), Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR) are used to evaluate projects.

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. It has analyses of various approaches, such as Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE), SciVerse ScienceDirect (Elsevier), Informa - Taylor & Francis (CrossRef), Wiley (CrossRef), Business (JSTOR), Arts & Sciences (JSTOR), Proquest ,MEDLINE (NLM), and Wiley Online Library. Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them.
 Keywords: Capital budgeting theory and practices, capital budgeting tools for incorporating risk, discount rate