Abstract:
Purpose – The purpose of this paper is to investigate prevailing capital budgeting practices in Sri
Lankan listed companies.
Design/methodology/approach – A comprehensive primary survey was conducted of 32 out of 46
chief financial officers (CFOs) of manufacturing and trading companies listed on the Colombo Stock
Exchange in Sri Lanka. Garnered data were then analyzed using appropriate statistical techniques.
Findings – The results revealed that net present value (NPV) was the most preferred capital
budgeting method, followed closely by payback (PB) and internal rate of return (IRR). Similarly,
sensitivity analysis was regarded as the dominant capital budgeting tool for incorporating risk and the
widely used method for calculating cost of capital was the weighted average cost of capital. Moreover,
results revealed that size of the capital budget affects the use of the capital budgeting methods (NPV,
IRR and PB) and incorporating risk tool (sensitivity analysis and simulation). Further, results revealed
that CFOs had higher educational qualification were preferred to use sophisticated capital budgeting
practices dominantly NPV, IRR and incorporating risk tool of sensitivity analysis although they were
found to be reluctant in use of accounting rate of return. In a similar vein CFOs with higher experience
were preferred using IRR and sensitivity analysis.
Originality/value – This study contributed to academics, practitioners, policy makers and
stakeholders of the company. Moreover, this research has proffered a more reliable and comprehensive
analysis of capital budgeting practices in Sri Lankan listed manufacturing and trading firms. Since
Sri Lanka is an unexplored country on capital budgeting practices, this research was originally
contributed to the extant literature per se.
