Abstract
This paper reports the investigation results of capital budgeting evaluation practices of Hong Kong building contractors. The survey aims to identify the popularity of various techniques for capital budgeting evaluation and to measure the changes of the practices longitudinally by comparing the results of the current study (2004) with those of the similar surveys conducted in 1994 and 1999. The current survey results revealed that the “formal financial evaluation” was the most popular technique for capital budget evaluation. The “payback period” was the mostly used investment appraisal technique. For risk appraisal techniques, “shortening payback period” occupied the first position. The “planning programming” remained as the most popular management science technique. Moreover, a comparison of the practices of large contracting firms was carried out to view the changes over the last 10 years. The results showed that the practice of capital budget evaluation was emphasized. The popularity of employing investment appraisal and risk analysis techniques was dropping. In addition, the capital budgeting evaluation techniques examined were fitted into a discriminant function analysis (DFA), which allowed contracting firms to be classified in accordance with their predominant characteristics in the practices. The classification result was 89.1% of all cases were correctly classified.
Highlights
Capital assets are used by the company in the physical process of producing goods and services and are ordinarily used for a number of years
This paper examines the capital budget evaluation procedures used in the construction industry of Hong Kong (HK) in 1994 and 1999
Searching and screening of alternatives before accepting projects Formal financial evaluation Formal analysis of risk Analysis under different assumptions Payback period Average accounting rate of return Internal rate of return Net present value Shortening payback period Raising required rate of return or discount rate Probability analysis Sensitivity analysis Beta analysis Mathematical programming Computer simulation Decision theory Planning programme Consider inflation at risk analysis/sensitivity stage Specify cash flows in constant process and apply a real rate of return Adjust for estimated changes in general inflation Specify different rates of inflation for all costs and revenues Computer package or financial modelling system used for investment analysis
Summary
Capital assets are used by the company in the physical process of producing goods and services and are ordinarily used for a number of years. The plan for expenditures is called a capital budget. Previous research studies on capital budgeting have mainly focused on the application and improvement of modelling techniques. Other researchers proposed the use of mathematical and optimisation methods for capital budgeting (e.g. Aston, 1978; Bhaskar, 1978; Jennergren, 1990). While these modelling techniques are significant to the improvement of capital budgeting decision-making, relatively little research has been directed towards the behaviour of financial management within the construction industry, in particular the practices of capital budget evaluation used by contractors in different countries. The purposes of the DFA are to classify the financial management practices according to the peculiar characteristics of firms, and to establish the variables which have the greatest impacts on capital budgeting evaluation practices
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