Capital budgeting: A case study analysis of the role of formal evaluation techniques in the decision making process

Abstract

This paper furthers the understanding of capital budgeting by reviewing two individual capital investment decisions taken by manufacturing firms in South Africa. This study indicates that managers do not base their capital investment decisions on a comparison of the expected value of potential investment opportunities as recommended by theory. Rather they follow a multi-stage filtering process and reduce the list of projects by establishing the alignment with the firm’s strategic goals on a qualitative basis. Discounted cash flow project evaluation methods (among others) are then used to confirm that the selected projects are expected to achieve satisfactory levels of financial performance. This analysis promotes a better understanding of the unexpectedly limited use of discounted cash flow techniques by managers in capital investment decision making.

Key Words:

• Capital Budgeting
• Decision making processes
• Discounted cash flow techniques
• Valuation
• Net Present Value (NPV)
• Case study