Capital budgeting practices: a study of companies listed on the colombo stock exchange sri lanka

Abstract

In today’s highly competitive business environment long-term capital investments have become a critical issue. Organizations are still making efforts to understand suitable capital budgeting techniques. The importance has been given to capital investment for the creation of shareholder wealth for individual firms. It is vital to investigate the practices used to evaluate the projects. The sample is selected from manufacturing; pharmaceuticals and chemicals, and textile sectors. The study is exploratory nature. Capital budgeting techniques i.e., Pay Back Period (PBP); Accounting Rate of Return (ARR); Net Present Value (NPV); Internal Rate of Return (IRR) and Profitability Index (PI) methods have been used as the techniques of capital budgeting. Finally, the results show that NPV method is the most dominant capital budgeting technique according to the perception of executives of all sectors. It has been found that the executives mostly prefer NPV and IRR methods of capital budgeting from the companies of the manufacturing, pharmaceutical and chemical sectors, where as the executives of the textile sector prefer the NPV method for evaluating capital budgeting. Further, this study attempts to give a sector wise solution with the help of a model for capital budgeting practices.