An empirical insight into the Capital Budgeting Practices in the Manufacturing Firms in Pakistan

Abstract

Capital Budgeting (CB) is a dynamic process deployed by organizations to identify financially appealing and profitable projects usually from an array of options. Capital Budgeting (CB) practices in Pakistan are under-explored and especially the role of non-financial factors in CB decisions is yet unclear. The purpose of this research is to explore the capital budgeting process in the manufacturing firms focusing on the obstacles these firms face and the nonfinancial factors firms used in their decision making. In this quantitative research data was collected from 52 manufacturing companies listed on the Pakistan Stock Exchange through a survey questionnaire adapted from previous studies. The survey was limited to the listed firms only which tend to be more organized hence the results might not reflect the reality of non-listed firms. Data were analyzed using simple statistical measures like mean, median, and standard deviation. The results show that payback period and net present value are the two most frequently deployed CBTs; whereas the newer technique like real options is seldom used. Firms perceive data forecasting as the main obstacle in deploying the CBT and consider the strategic importance of the project in its capital budgeting decisions. Our findings can help the firms in improving the quality of their CB decision-making by incorporating the non-financial factors. This research provides the initial results on which future researchers can build.