Use of Capital Budgeting Methods for Investment Project Evaluation in the Field of Civil Engineering

Nadja Ferlan,Igor Psunder

doi:10.3844/ajassp.2008.18.21

Abstract

The present article deals with use of capital budgeting methods in investment and project evaluation, with special emphasise on their use in the field of civil engineering. The research, presented in this article, was performed among project managers of Slovene companies. Their personal opinions about the use of capital budgeting methods and knowledge of their faults were studied during the research. Discounted cash flow methods were investigated, as well as single-period. During analysis of the results the situation in the field of civil engineering was treated separately and compared with other technical and non-technical sciences. Research showed that those experts dealing with investment evaluation who have a degree in the field of civil engineering use capital budgeting methods for investment evaluation less often than experts from other technical sciences, economics, and similar sciences. However, civil engineers are more familiar with the flaws in capital budgeting methods. More than 80 % of civil engineers know the faults of the payback period method’s disregard of payment expiration, but at the same time, only half of them know about the multiple internal rate of return, which is the most common fault of this method.

Highlights

Research carried out at the end of the last century shows that, the use of discounted cash flow methods for investment and project evaluations has increased over the previous few decades
From discounting cash flow methods, we focused on the internal rate of return method; and from the single-period methods, we focused on faults of the payback period method
Use of discounting cash flow methods and knowledge of their flaws: Among discounting cash flow methods, the most commonly used method in Slovene companies is the net present value method, while the least popular is use of the modified internal rate of return method

Summary

Introduction

Research carried out at the end of the last century shows that, the use of discounted cash flow methods for investment and project evaluations has increased over the previous few decades. Among these methods, the internal rate of return method (IRR) and the net present value method (NPV) were the most common. Similar conclusions for the UK were drawn by Pike[2], who established that the use of either the internal rate of return or net present value methods in large UK companies grew from 58 % to 84 % between 1975 and 1986. Special stress was placed on experts with education in civil engineering and companies who deal in this field of engineering

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Conclusion