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South African Journal of Economic and Management Sciences

versión On-line ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.13 no.1 Pretoria ene. 2010

 

FINANCIAL MANAGEMENT

 

Capital budgeting practices used by selected listed South African firms

 

 

John HallI; Sollie MillardII

IDepartment of Financial Management, University of Pretoria
IIDepartment of Statistics, University of Pretoria

 

 


ABSTRACT

This article investigates the application of capital budgeting techniques and the incorporation of risk into the capital budgeting process among a sample of South African industrial firms listed on the JSE Securities Exchange for at least ten years. Previous international and local research on this topic indicated a preference for the internal rate of return (IRR) as a capital budgeting method over the net present value (NPV), and that risk incorporation was relatively rarely incorporated into the capital budgeting process. The results of this study indicate that the NPV is just as popular as, and sometimes more so than, the IRR. Furthermore, compared to previous studies, risk is incorporated into evaluating capital budgeting projects more often. Sensitivity analysis is the most popular method, but adjustments to the cash flows and discount rate are becoming more popular. During the last decade the use of non-financial criteria to accept or reject a project has also increased in South Africa.

Key words: Capital budgeting practices; net present value; internal rate of return; risk in capital budgeting; sensitivity analysis in capital budgeting

JEL: G31


 

 

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Accepted February 2009

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