Investigating aspects of the capital budgeting process used in the evaluation of investment projects

Abstract

Given the importance of capital investment, not only for the country as a whole but the creation of shareholder wealth by individual firms, it is vital to investigate the practices used to evaluate these projects. The findings of this study suggest that the most important stages in the capital budgeting process are project definition and cash flow estimation, not financial analysis. Further, in the evaluation of capital investment projects, South African companies seem to prefer Return on Investment and Internal Rate of Return as methods to determine the feasibility of a project. The use of these methods is influenced by the size of a company's annual capital budget, as there is a correlation between a company's annual capital budget and a preference for these methods.