An Empirical Investigation of the Capital Budgeting Process

During recent years many opportunities arose for companies because international trade restrictions were lifted. As international markets became more accessible to local manufacturers, the degree of competition increased tremendously, resulting in a revaluation of the way business is conducted by South African companies. Given the importance of capital investment, not only for the country as a whole, but also for the creation of shareholder wealth for individual firms, it is vital to investigate the practices used to evaluate these projects. The findings of this study suggest that the most important stages in the capital budgeting process are project definition and cash flow estimation, not financial analysis. An important finding of this research is that, in the evaluation of capital investment projects, South African companies seem to prefer Return on Investment and Internal Rate of Return as methods to determine the feasibility of a project. The use of these methods is influenced by the size of a company's annual capital budget, as there is a correlation between a company's annual capital budget and a preference for these methods. As the annual capital budget increases, there is a tendency to use these methods more extensively