Capital budgeting is crucial in the maximisation of shareholder value as it depends on the capital budgeting decisions made by the managers. The capital budgeting techniques used by South African mines listed on the Johannesburg Securities Exchange (JSE) and the reasons behind their use were investigated. Questionnaires were conducted during the period of March to May 2011 to gather data. The results also indicated that the net present value (NPV) (69%), the internal rate of return (IRR) (46%) and the payback period (PB) (23%) are the most common techniques used to evaluate major projects. The main reason for the use of the NPV was its superiority as it accurately takes into account the time value of money. The IRR method is used owing to its ability to rank projects and to indicate the actual return of each project, thereby informing managers whether an investment will increase the company’s value. The results indicated that the continual use of PB was based on the simplicity of the technique. Financial officers (FOs) should also make use of other techniques for example, discounted payback period (DPB), profitability index (PI) and the real options which are of valuable in determining the feasibility of projects.

	 

	Key words: Capital budgeting techniques, net present value, internal rate of return, payback period, mining companies, South Africa.

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A survey of capital budgeting techniques used by listed mining companies in South Africa

Rapid change in the business environment worldwide has driven the transformation of small-to-medium size forest enterprises (SMFEs) to advance toward sustainable development. Although the success of SMFEs is important for every developing economy researchers have shown a high failure rate of about 90% around the globe because of poor financial management practices. Literature related to financial management practices suggests the benefits of executing financial management practices for improving business growth. This research contributes to the existing gap in financial management practices literature by analysing the impact of financial management practices on the growth of SMFEs in the developing economy of Pakistan. The focus of this research was on the five financial management practices, namely working capital management, financial reporting, accounting information systems, investment decisions, and financing. Data was collected from 260 SMFEs owners, finance managers, and other finance staff through structured questionnaires to test the five hypotheses. The findings of the analyses show that a higher degree of conduct of working capital management, financial reporting, accounting information systems, investment decisions, and financing practices is positively associated with financial performance and firm growth. The results also indicate a significantly strong positive correlation between financial management practice and firm growths. The improvement of financial performances in small firms using financial management practices offers valuable implications for owners, managers, and regulators and is a crucial factor for the success of SMFEs. This study continues the discussion on several practical implications along with recommendations for future research.

Effect of financial management practices on the development of small-to-medium size forest enterprises: insight from Pakistan

Investment appraisal practices: A comparative study of conventional and Islamic financial institutions

https://www.repository.cam.ac.uk/bitstream/1810/292464/3/GlobalFinance_REIT_econscale.pdf

Size effects and economies of scale in European real estate companies

This study proposes a three-stage holistic methodology combining an interval type-2 fuzzy analytical hierarchy process (IT2F-AHP) and data envelopment analysis (DEA) to deal with the performance ev...

Performance Evaluation of Real Estate Investment Trusts using a Hybridized Interval Type-2 Fuzzy AHP-DEA Approach: The Case of Borsa Istanbul

The 1990s were tumultuous times for the US Real Estate Investment Trusts (REITs) industry. Significant structural changes occurred during the decade, especially after the 1993 Revenue Reconciliation Act, which tremendously boosted the flow of funds into the system by allowing the participation of institutional investors in REITs. As a result, the industry experienced remarkable asset growth during the decade, with a large number of initial public offerings and substantial increases in market capitalization. Employing the Data Envelopment Analysis-type Malmquist index approach, this paper explores the impact of such environmental changes on productivity growth, efficiency change, and technological progress of REITs. Our results indicate that while efficiency of the REITs significantly increased, their average productivity declined and technology regressed during this decade. It appears that the typical REIT has failed to improve technically, but exerted substantial effort to catch up with the best practice ones relying mainly on aggressive growth strategies. However, our empirical results indicate that they might have overextended themselves as most began to suffer from diseconomies of scale.

Structural changes, market growth and productivity gains of the US real estate investment trusts in the 1990s

We surveyed members of the Durant, Oklahoma Chamber of Commerce to ascertain the level of sophistication that small rural businesses exhibit in capital expenditure decision making. Our survey covered a variety of discounted cashflow (DCF) and other traditional techniques and also examined the incidence and treatment of capital rationing. Finally, we examined the methods used to determine the required return and the use of sensitivity analysis, scenario analysis, and simulation. Results reveal that 71% of the sample firms do not have a written business plan and 66% use managerial judgment in project selection. INTRODUCTION Capital budgeting decisions, also known as capital investment or capital expenditure decisions, remain critical to the success of any firm. Brigham and Ehrhardt (2007) argue that sound capital budgeting decisions are vital to a firm's financial well-being and are among the most important decisions that owners or managers of firms must make. Their rationale for that belief is that capital budgeting decisions often involve a significant capital outlay to acquire land, buildings, or equipment. Additionally, the acquisition of these assets often comes with longlasting and recurring financial obligations. Thus, financial constraints such as loan payments, lease payments, or interest payments can create a financial hardship for firms that undertake a project whose expected stream of future cash flows does not materialize or is insufficient to provide the required return on investment. Moreover, capital budgeting may also define or constrain future strategic decisions because these decisions often require the acquisition of costly assets that have long economic lives and limited marketability or liquidity. Thus, firms often make long-term commitments that are not quickly or easily reversible. The long-lived and often illiquid assets, large capital requirements, and the constraints on future operating and strategic decisions combine to make sound capital budgeting decisions vital to the financial health of a firm. Given the importance of capital budgeting decisions, it is crucial that decision-makers understand how to evaluate projects correctly so that they can make informed decisions concerning which projects to accept and which projects to reject. It is common in business schools to require all business students to take at least one finance course that covers the essential elements of capital budgeting. Moreover, finance majors are routinely required to take a specialized course in capital budgeting that extends the breadth and depth of coverage and includes many nuances that the student may encounter in practice. Despite the coverage by business schools, a plethora of past surveys of large firms suggests that decision-makers often use less formal procedures than those recommended by business schools. For example, Pattillo (1981) reports that 75% of his sample does not use discounted cash flow techniques (DCF). Despite the early evidence of the low usage of sophisticated capital budgeting practices of large U.S. firms, later studies report an increased usage of sophisticated capital budgeting and risk adjustment techniques (e.g., Klammer & Walker, 1987). Evidence on the capital budgeting practices of firms other than large U.S. firms is not as theoretically satisfying. Lazaridis (2004) concluded that there is a need to educate and train managers of Cypriot firms in the capital budgeting area, suggesting that at least some countries are not using the most sophisticated techniques available. While there is an abundance of studies targeting large and international firms, few studies examine small firms. However, Runyan (1983) reported that few small firms use sophisticated capital budgeting or risk adjustment techniques. More recently, Graham and Harvey (2001) surveyed 392 CFOs and found that small firms are much more likely to use the unsophisticated and severely flawed payback method than to use more robust discounted cash flow methods. …

John C. Topuz

Papers

Structural changes, market growth and productivity gains of the US real estate investment trusts in the 1990s

Capital Budgeting Practices of Small Businesses: Evidence from Rural America

Meet the “born efficient” financial institutions: Evidence from the boom years of US REITs

Index Funds or ETFs: The Case of the S&P 500 for Individual Investors

How Efficient The REITs Are Upon Entry