Investment Appraisal Techniques and Financial Performance of Small and Medium Enterprises in Nairobi City County, Kenya

Abstract

Small and Medium Enterprises play a major role in the social economic development of any country, however these enterprises face investment decision problems which inhibit their financial performance. Poor investment decisions have been blamed for high rate of failure and closure. Thus, the purpose of the study was to determine the effects of investment appraisal techniques and financial performance among small and medium enterprises in Nairobi County, Kenya. The objectives of the study were to: determine the effect of Accounting Rate of Return, payback period, Net Present Value and Internal Rate of Return on financial performance among small and medium enterprises in Nairobi County, Kenya. The information that provided by this research will benefit policymakers, community members and academicians. The study adopted cash flow theory of investment, Theory of Investment Decisions, Agency Theory and Q Theory of Investment. It adopted a descriptive survey research design with a target population of 71,195 licensed Medium Enterprises with Nairobi County. The sample size was 384 Small and Medium Enterprises. The researcher adopted cluster random sampling technique and collected data using questionnaires. The instruments were validated by the supervisors. Reliability of the instruments was determined through a pilot study where a Cronbach alpha coefficient of 0.7 was considered appropriate. Quantitative data was analyzed using descriptive statistics and inferential statistics and presented in tables. The study revealed that Accounting Rate of Return (t =6.702, P<.05), payback period (t =16.489, P<.05), Net Present Value (t =3.295, P<.05) and Internal Rate of Return (t =2.133, P<.05) significantly affect financial performance among SME’s in Nairobi County, Kenya. Besides, these results imply that payback period is most (t =16.489, P<.05) important predictor for financial performance. The study recommends that the government and other service providers such as Small Industries Development Organization to focus more on the issue of investment decisions for small and medium enterprises. In particular, they should train small and medium enterprises on the investment evaluation techniques, their advantages and disadvantages in relation to their financial goals.