CAPITAL BUDGETING TECHNIQUES AND FINANCIAL PERFORMANCE OF MANUFACTURING COMPANIES LISTED ON NAIROBI SECURITIES EXCHANGE (NSE)
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
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