Abstract:
Research aims: This study aims to investigate the prevalent choice
of capital investment appraisal practices and the influence of firm
characteristics on the choice of these practices.
Design/Methodology/Approach: A survey is conducted by using a
sample of 186 Chief Financial Officers (CFOs) from companies listed
on the Colombo Stock Exchange platform in Sri Lanka.
Research findings: This study reveals that the most popular capital
investment appraisal techniques used in Sri Lanka encompass Net
Present Value (NPV), followed by Internal Rate of Return (IRR),
Payback (PB), Accounting Rate of Return (ARR) and Discounted
Payback (DPB). As for the capital investment appraisal tools
incorporating risks, Sri Lankan firms prefer uncertainty absorption
in cash flows, followed by sensitivity analysis, probability analysis,
scenario analysis, and adjusting the required returns. Emerging real
options are used at the embryonic stage in Sri Lanka. The use of
naive capital budgeting practices is mostly preferred by small firms
managed mainly by CFOs with non-MBA educational qualifications
with short tenures in the firms. In contrast, sophisticated and
advanced capital budgeting practices are mostly used by large firms
managed by MBA qualified CFOs with a long tenure in the firms. As
for industry differences, ARR is primarily applied by non-MBA CFOs
in most non-manufacturing firms. None of the other methods trigger
any significant difference in terms of industry types.
