Capital budgeting techniques, Slides of Financial Market

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CAPITAL BUDGETING

TECHNIQUES

Practiced by Bangladeshi Companies

Created By

Flora

Chisty

Pinky

Md

Abstract  (^) This descriptive research sheds light on capital budgeting practices of the companies in Bangladesh.  (^) 56 companies from different industry sectors were chosen  (^) This is the first comprehensive study on this topic to focus on companies in Bangladesh.  (^) Questionnaire was developed based on [7]’s survey instrument  (^) In general, companies in Bangladesh are more sophisticated in terms of capital budgeting techniques used and risk adjustment practices thereby than companies in other emerging economies but less sophisticated than companies in developed world in terms of risk adjustment practice  (^) Influence of some factors i.e., CEO/CFO background and company size on capital budgeting practices have also been explored

Capital Budgeting Techniques

● Most Frequently used NPV (88%), IRR(79%), PI (67%).

● For limited financial resources PI is used.

● Half of the firms rarely or never uses DPBP.

● PBP(75%), non DCF method is used often or always using.

● Sensitivity (49%) or scenario (44%) analysis is used.

● Real option and decision tree are rarely used.

Discount Rate

● Mostly used method, Discount rate for entire company (70%).

● And than Risk adjusted rate (54%).

● Other rates are rarely or never used.

● Eastimate own cost of capital or discount rate.

● Using WACC as discount rate (84%).

● Other uses cost of debt.

Factors influencing Capital

budgeting Techniques Used

Table: Selected Cross-tab output

non- business business non- Total Education business graduate masters business graduate masters Never 0.0% 0.0% 7.0% 4.7% 11.6% Rarely 0.0% 0.0% 4.7% 0.0% 4.7% Sometimes 4.7% 2.3% 7.0% 0.0% 14.0% Frequently 0.0% 0.0% 11.6% 2.3% 14.0% Always 2.3% 2.3% 39.5% 11.6% 55.8% Total 7.0% 4.7% 69.8% 18.6% 100.0%

How frequently does your company

use company discount rate?

Conclusion  (^) NPV is the most frequently used capital budgeting technique in the companies  (^) Majority of the companies use multiple techniques  (^) Emerging economies like Rwanda, South Africa, Czech Republic reveal prevalence of PBP and DPBP techniques  (^) It can be said that Bangladeshi companies follow practices of firms in developed world (the USA, Great Britain) where NPV and IRR are prevalent methods followed by PBP of capital budgeting  (^) Therefore, it can be concluded that capital budgeting practices of the companies in Bangladesh is more sophisticated than many other emerging economies  (^) Developed economies can be considered as benchmark for the capital budgeting practices of Bangladeshi companies