Abstract
Over the years a large number of studies have been conducted regarding capital budgetin practices in well-developed markets. There is, however, scarce evidence of these practices in emerging markets. This paper discusses evidence of capital budgeting practices followed by large companies operating in Peru. A survey conducted among 74 companies showed that, while 90% of the companies use Net Present Value (NPV) as their main assessment tool, only 11% use the real option method. This indicates that the companies reviewed in this study do not formally consider a flexible management approach to assessing their opportunities for investment. The survey also showed that there is a stronger preference for the Investment Recovery Period than for the Internal Rate of Return (IRR), which reflects a short-term investment horizon. This paper also addresses the fact that more than 40% of these companies employ a discount rate without a solid theoretical justification, which may be the result of a lack of practical guidance on this subject.
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