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

Abstract

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.

Capital Budgeting Techniques: Estimation of Internal Rate of Returns

“…IRR is used by managers as a result of its ability to rank projects as well as being able to inform managers of the increase or otherwise in the company's value from an investment [11]. There is evidence that large companies use IRR in their investment appraisal more importantly, companies with high growth opportunities, high leverage and high dividend pay-out [12,6].…”

Capital Budgeting Theory and Practice: A review and agenda for future research

“…Scholarship on the practice of capital budgeting in many countries has found that firms are increasingly employing more sophisticated capital budgeting techniques in order to make investment decisions over several years (Klammer, 1973;Klammer and Walker,1984;Pike,1988;Jog and Srivastava,1995;Gilbert and Reichart,1995;Farragher, Kleiman and Sahu,1999;Arnold and Hatzopoulos, 2000;Brounen, de Jong and Koedijk, 2004;Truong, Partington and Peat,2008;Baker, Dutta and Saadi,2011). In the contemporary world, there are a number of sophisticated capital budgeting methods including the oft-cited: Monte Carlo Simulations, Game theory decision rules , Real option pricing, Using certainty equivalents, Decision trees, CAPM analysis / ß analysis, Adjusting expected values, Sensitivity analysis/break-even analysis, Scenario analysis, Adaptation of required return/discount rate, IRR, NPV, uncertainty absorption in cash flows, and PB (e.g., Arnold and Hatzopoulos, 2000;Hall, 2000;Graham and Harvey, 2001;Ryan and Ryan, 2002;Murto and Keppo, 2002;Cooper et al, 2002;Smit, 2003;Sandahl and Sjogren, 2003;Brounen, de Jong, and Koedijk 2004;Lazaridis, 2004;Lord, Shanahan and Bogd, 2004;du Toit and Pienaar, 2005;Verbeeten, 2006;Elumilade, Asaolu and Ologunde, 2006;Hermes, Smid, and Yao , 2007;Leon, Isa and Kester, 2008;Correia and Cramer, 2008;Verma, Gupta and Batra, 2009;Bennouna, Meredith and Marchant, 2010;Shinoda, 2010;Hall and Millard, 2010;Dragota et al, 2010;Poudel et al, 2009;Kester and Robbins, 2011;Maroyi and Poll, 2012;…”

ANALISIS CAPITAL BUDGETING SEBAGAI ALAT PENGAMBILAN KEPUTUSAN INVESTASI: Studi Kasus

“…Menurut Rigopoulos (2015) bahwa keputusan penganggaran modal adalah yang paling penting untuk kinerja perusahaan dan prospek masa depan. Beberapa studi terdahulu telah menunjukkan pentingnya praktek penganggaran modal sebagai alat untuk mengevaluasi kelayakan kemungkinan investasi di dunia usaha (Maroyi & Poll, 2012). Olawale (Maroyi & Poll, 2012) menggambarkan penganggaran modal sebagai suatu formulasi dan pembiayaan rencana jangka panjang untuk investasi.…”