CAPITAL BUDGETING TECHNIQUES AND FINANCIAL PERFORMANCE OF MANUFACTURING COMPANIES LISTED ON NAIROBI SECURITIES EXCHANGE (NSE)
Abstract
Purpose of the Study: The purpose of this study was to investigate the influence of capital budgeting techniques on financial performance of Manufacturing companies listed at Nairobi Securities Exchange (NSE). This study was supported by five specific objectives which are to determine the capital budgeting techniques used by manufacturing companies listed at the NSE, to determine the influence of Payback Period on financial performance of Manufacturing companies listed at NSE, to determine the influence of Accounting rate of Return on financial performance of Manufacturing companies listed at NSE, to determine the influence of Net Present Value on financial performance of Manufacturing companies listed at NSE, and to determine the influence of Internal Rate of Return on financial performance of Manufacturing companies listed at NSE.
Problem Statement : Modern financial management theory assumes that the primary objective of a firm is to maximize the wealth of its owners. Hence, optimal investment decisions are the ones that maximize the shareholder’s wealth. This fact shows that the shareholders wealth can be increased as well as maximized when the capital budgeting techniques are properly selected. Therefore, the positive influence of capital budgeting techniques on financial performance is expected in this perspective.
Study Methodology: The study used a census survey to collect data with a population of 8 manufacturing companies listed on NSE. Primary Data was collected using a questionnaire and Secondary data was collected from the published financial statements of the companies. Data was analysed using SPSS computer programme to find the correlation coefficient between the independent variables and the dependent variable.
Results of the Study: The findings of the study revealed that Payback Period and performance were positively and significantly related (β=.083, p=0.000), Accounting Rate of Return and performance are positively and significantly related (β=.300, p=0.000), Net Present Value and performance were positively and significantly related (β=.095, p=0.037). Finally, the findings revealed that, Internal Rate of Return and performance were positively but not significantly related (β=.030, p=0.296).
Conclusion: The study concluded that Net Present Value, Accounting Rate of Return and Payback Period positively and significantly affect the financial performance of listed manufacturing companies in Kenya. However, internal rate of return was found to be positively but not significantly related to financial performance. In addition, the study concluded that firm size partially moderates the relationship between Capital Budgeting Techniques and Financial Performance of Manufacturing Companies Listed on Nairobi Securities Exchange (NSE).
Recommendation: Based on the findings the study recommended that the managements of the manufacturing companies listed on NSE should adopt the most effective capital budgeting techniques which can result in improvement performance.
Keywords: Capital Budgeting, Accounting rate of return, Payback period, Net present value
References
Batra, R. & Verma, S. (2017), capital budgeting practices in Indian companies, IIBM Management review 29, 29-44, retrieved from http://www.elsevier.com/locate/iimb;
Chan, H., Haddad, K. & Sterk, W. (2008), Capital Budgeting Practices of Chinese Firms, The Journal of Global Business Managament, 4(2), 27-41.
Farragher, E.I, Robert, T.K. & Ananda, S. (2001). The association between the use of sophisticated capital budgeting practices and corporate performance, the Engineering Economist, 4(4), 300-311.
Gasana, L. & Kariuki, P. (2017), Influence Of Capital Budgeting Techniques on The Financial Performance Of Companies Listed At The Rwanda Stock Exchange, European Journal of Business and Social Sciences, 6(06), 01– 14, retrieved from http://www.ejbss.com/recent.aspx-/ ISSN: 2235 -767X.
Gilbert, E. (2005), Capital Budgeting: A case study analysis of the role of formal evaluation Techniques in the decision-making process; South African journal of accounting Research, 19(1), 19-36, DOI: 10-1018.
Hasan, M. (2012), Capital Budgeting Techniques Used by Small Manufacturing Companies in Australia, Journal of Service Science and Management, 6,38-45,DOI: 10.4236;
Kengatharan, L. (2016), Capital Budgeting Theory and Practice: A Review and Agenda for Future Research, Journal of Applied Economics and Finance, 3(2), DOI: 10.11114;
Klammer, T. (2008), The Association of Capital Budgeting Techniques and Firm Performance, American accounting Association 48(2),353-464, retrieved from https://www.jstor.org/stable/244924;
Magni, C. A. (2011), Aggregate return on investment and investment decisions: A cash flow perspective, The Engineering Economist, 56(2), 140-169;
Modigliani, F., & Miller, M. H. (1958), the cost of capital, corporation finance and the theory of investment, The American Economic Review, 261-296;
Mooi, S. & Mustapha, M. (2001), Firm Performance and Degree of Sophistication of Capital Budgeting Practice: Some Malaysian Evidence; Proceedings of the Asia Pacific Management Conference, 19 (1) 279-29;
Nyambura, I.E. (2014), Relationship between capital budgeting techniques and financial performance of companies listed at the Nairobi Securities Exchange, retrieved from http://chss.uonbi.ac.ke/sites/default/files/chss/project.....pdf;
Nyarombe, F., Kipyegon, K., kamar, I., Gwaro, S. (2015), an investigation of capital budgeting techniques on performance: a survey of selected companies in Eldoret Town, International Journal of Business and Management Invention, 4(1), 54-70, retrieved from ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X www.ijbmi.org ;
Obi, A.N. and Adeyemo, S.O. (2014), Evaluation of Capital Budgeting and Investment Decisions in Nigeria, Open Access Library Journal, 1 e141, DOI: 10-4236;
Pandey, I.M. (2015), Financial Management, Noida; New Delhi: Vikas publishing house pvt Ltd;
Patrick ,M. W and J. Koori (2018), Investment Appraisal Techniques and Financial Performance of Small and Medium Enterprises in Nairobi City County, International Journal of Current Aspects in Finance (IJCAF), 4(2), 89- 101, retrieved from www.ijcab.org/journals, ISSN 2616-6976 89;
Pike, R. & Neale, B. (1999), Corporate Finance and Investment, Barcelona, Prentice Hall Europe;
Pike, R. (2007), Capital budgeting and corporate performance, Management research news, 4 (1);
Sekwat, A. (1999), Capital budgeting practices among Tennessee, Municipal Government, Government Finance Review, 15-19;
Tufuor, A.N.F & Doku, J.N (2013), Capital budgeting practices in emerging market economies: Evidence from listed Ghanaian firms, research Journal of Finance and Accounting, 4(17), retrieved from www.iiste.org/ISSN 2222-1697 (Paper) ISSN 2222-2847;
Viviers,S & Cohen, H (2011), Perspectives on capital budgeting in South African motor manufacturing industry, Mediatri Accountancy research, 19(1/2); 75-93, DOI: 10.1108
Yao, L., Smid, P. & Hermes, N. (2006), Capital Budgeting Practices: A Comparative Study of the Netherlands and China, International business Review 16(5), 630-654, DOI: 10.2139.
