Capital Budgeting Decisions in India: Manufacturing Sector Versus
The IUP Journal of Applied
Divya Gupta and B B Pradhan
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The purpose of this paper is to confirm the impact of various variables which influence the capital budgeting decisions in India. The analysis is done on the basis of types of industries. All companies are divided into two parts: manufacturing sector and non-manufacturing sector. The factors affecting capital budgeting decisions in both the sectors are analyzed separately. This paper is based on the primary data. Using a sample size of 75 companies, with the support of factor analysis and regression analysis, this study finds that out of four factors—Size, Risk, Social Cost Benefit Analysis (SCBA) and Trait—Size and SCBA are significant and influence the decision of acceptance of the Type of Capital Budgeting Technique (TCBT) used by the companies in manufacturing and non-manufacturing sectors in India.
Capital budgeting decisions have a bearing on the competitive position of the company mainly because of the fact that they relate to fixed assets. Therefore, such capital investment decisions may result in a major departure from what the company has been doing in the past. Acceptance of strategic investment will involve a significant change in the company’s expected profits and in the risks to which these profits will be subjected. These changes are likely to lead stockholders and creditors to revise their evaluation of the company. Thus capital budgeting decisions determine the future destiny of the company. Gitman (2009) defines the capital budgeting process, which evaluates and selects the long-term investments that are consistent with the goal of the firm, i.e., shareholder wealth maximization. Brealey and Myers (2000) define capital budgeting process as a process to assess the risk, choose the right discount rate and crank out net present value. Schall and Haley (1991) define capital budgeting as a process of determining how much to spend on capital assets and which assets to acquire. Capital budgeting techniques are divided into two categories: non-discounted cash flow techniques (traditional techniques) and Discounted Cash Flow (DCF) techniques. A non-discount method of capital budgeting does not consider the time value of money. In other words, each rupee earned in the future is assumed to have the same value as each rupee that was invested many years earlier. Whereas DCF techniques consider time value of money.
Applied Finance Journal, Capital Budgeting Decisions in India, Manufacturing Sector Versus