Capital Budgeting Practices in Corporate Finance
Summary
Capital budgeting constitutes the systematic evaluation of long-term investment projects to determine their potential to generate shareholder value. It encompasses stages of project identification, cash-flow estimation, risk assessment, selection and post-investment review. The dominant techniques are based on discounted cash flow (DCF) methods, notably net present value (NPV) and internal rate of return (IRR), although many organisations also apply simpler rules such as the payback period for preliminary screening. In recent years, research has emphasised the integration of risk-adjusted discount rates, real-options analysis and scenario modelling, supported by digital analytics and artificial intelligence. Non-financial criteria—including environmental, social and governance factors—are increasingly incorporated into decision frameworks, reflecting a broader view of project value. Surveys across diverse markets reveal that adoption of sophisticated capital budgeting tools correlates with firm size, regulatory context and managerial expertise. This evolving landscape underscores the global importance of rigorous capital budgeting practices in promoting sustainable growth and optimising resource allocation.
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Capital Budgeting Practices in Corporate Finance publication trend
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Technical terms
Net present value (NPV): The difference between the present value of future cash inflows and the initial investment cost.
Internal rate of return (IRR): The discount rate at which a project’s NPV equals zero, indicating its expected rate of return.
Discounted cash flow (DCF): A valuation approach that estimates the worth of an investment by discounting anticipated future cash flows.
Payback period: The duration required for cumulative cash inflows to cover the initial capital outlay.
Profitability index: The ratio of the present value of future cash inflows to the initial investment, reflecting value generated per unit of investment.
Sensitivity analysis: A technique that assesses how variation in key assumptions impacts project outcomes.
Real options: Valuation methods that incorporate managerial flexibility and strategic decision points within investment projects.
References
- Capital budgeting techniques and financial performance: a comparison between SMEs and large listed firms. Cogent Economics & Finance (2024).
- Capital budgeting practices by non-financial companies listed on Kuwait Stock Exchange (KSE). Cogent Economics & Finance (2018).
- Firm characteristics and the use of investment decision techniques in the global south: Evidence from Ghana. Cogent Business & Management (2023).
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