An investigation into the extent of application of capital budgeting techniques by food and beverage industries in Nairobi
Wanjeri, Florence Teresa
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This study analyzed the extent of application of capital budgeting techniques on 30 food and beverage industries in Nairobi. The study focused on analyzing the capital budgeting techniques utilized in investment decisions, the reason for their use, factor that inhibit effective use of capital budgeting techniques, factors that they base the investment proposals on and to find out the Capital Projects undertaken recently. Primary data was collected using a semi-structured questionnaire and analyzed using descriptive statistics. The results of the study showed that most food and beverage industries were locally owned and have been in existence for more than 20 years. The techniques that most finance managers were aware of and were mainly used included Payback Period and Net Present Value. Internal Rate of Return, Accounting Rate of Return and Profitability Index were the least used techniques. Most of the capital budgeting techniques used by the food and beverage industries were designed by the finance managers and outside consultants less than five years ago. Most firms indicated that they were using the current capital budgeting techniques because they were accurate and reliable, easy in understanding and applying and easy in interpretation of results. Easy and less costly to develop and detailed in analysis were least cited. For most firms, capital budgeting techniques were moderately used while for some few firms they were either widely or least used. From the results of the study the long-term investments carried out recently included: Launching of new products, acquiring new manufacturing plant and machinery, expanding warehouses and computerizing operation. The results of the study showed that most firms keep on undertaking new investment projects. As regards factors that inhibit effective application of capital budgeting; techniques, availability of capital, economic life, risk of the project undertaken, determining the discount rate and estimating cash inflows were most cited. Most firms indicated that implemented projects were reviewed at regular intervals while others cited once. Most projects were reviewed by the executive management. A number of recommendations were made based on the findings of the study. Among them was that firms should practice continuous improvement, use information technology and educate and train their executive management. Also higher institutions of learning should encourage students to do research on investment decisions since they are very vital decisions for the survival of firms. A firm's survival and profitability hinges on capital expenditure.