A STUDY ON CAPITAL BUDGETING PRACTICES IN INDIA

Part-B of dissertation report submitted in partial fulfilment of the requirement for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

By RUPAK GUMAN SINGH No. 1221533) (Registration

Under the guidance of Prof. Latha Ramesh

Institute of Management Christ University, Bangalore March 2014

CHAPTER 1

Introduction

1. Introduction
Capital budgeting assists decision making of an organization; evaluate multiple investments of the organization's capital. Capital budgeting is also used to plan regarding acquisitions of other companies, for the development of new innovative product lines of business, for the expansion of the existing plants or for the replacement of the worn-out assets, and in planning decisions on whether or not to enter a new segment in order to tap the opportunities, whether to buy or lease production resource, and it also helps in many other investment proposals resulting in costs and revenues that are spread over a number of years. According to modern financial management concept, the main goal of the organization is to maximise shareholder's wealth. In order to maximise shareholders wealth, the following decision-making processes of an organization are very crucial which plays an important role, and need to be cautiously considered. Firstly, the investment decision of the organization which makes sure that the present investment opportunities are capitalized to their best probable, that resulting in favourable future returns for the firm. Secondly, the financing decision which supports the investment decision, by deciding on probable funds available that can be employed in profitable investments opportunities for the future. A major part of the financing decision deals with the sources of funds i.e. how fund will be raised and which of the accessible funds will benefit the firm the most. Thirdly, the dividend decision of the organization, which supports the financing decision, by deciding how much of the firms earnings will be distributed to shareholders by the way of dividend and how much to be retained for future investments. Managers have to take bold decisions in capital allocation process like accepting new projects or building newfactories. Managers take such type of decisions on the basis of variousinvestment evaluation tools and other essential factors that influence the firm. There are various techniques which can be used to evaluate the investment proposals, these mainly include the accounting rate of return and payback period, discounted cash flow techniques like the net present value, internal rate of return technique and other techniques likegame theory,hurdle rates, real options analysis and sensitivity analysis. Although capital budgeting techniques have very important applications in investmentdecision of firms, they have been cited by academics as an incomplete technique ofinvestment appraisal. Practitioners claim that these techniques only assist in primaryscreening and approximate estimation of returns due to the inaccuracy in estimation ofvarious factors like cash flow, risk

analysis and estimated of cost of capital. Academicshave also agreed the acceptance of projects with returns below the required thresholdby management due to its strategic fit and flexibility.

1.2Capital Budgeting Techniques

Firms operating in a dynamic environment must continuously make changes in differentareas of its operations in order to meet the needs of a challenging environment for survival and growth. Continuous change helps organization in improving their operational process, which keeps the organization at an advantage position as compare to their competitors. Most of the changes which assist the organization involve major decisions regarding capital expenditure decisions, which generally require large sums of money.The expenditure might require for the diversification, takeover or it might require for the expansion in the current line. Prior to the decision of appraising an investment opportunity, the strategic need for the investment in particular project must be identified.Strategic need will help in identifying the various aspects such as, which investment proposal among the various investment opportunities will help the organization in meeting their strategic objectives and how much should the organization commit to the project in terms of human resources, time towards the investment and how much funds need to be invested. Mostly all the strategic decisions require large investments which increases the need of managers for a detailed analysis of project before making a final decision with regards to whether or not the project should be accepted by investing huge capital. Allinvestments is backed by the one form of return or another and decision regarding the investment decision would be dependent on the potential returns and their competence to justify the sacrifices (opportunity cost) that organization would have to make by investing in particular projects.Organizations justify large capital investments decisions using different capital evaluation techniques. The capital evaluation techniques have been developed over the years from the insight andanalysis of many researchers and practitioners and have become a standard practice inproject appraisal. They can be grouped in the following two categories: Unsophisticated capital budgeting techniques Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Discounted Payback Accounting Rate of Return (ARR)

Profitability Index

Sophisticated capital budgeting techniques Real Options Valuation Value Based Matrix Sensitivity Analysis

1.2 Unsophisticated capital budgeting techniques

1.2.1 Net Present Value (NPV) NPV is a standard method in finance for capital budgeting purposes. Managers use NPV as a cut-off / criterion for project selection, by undertaking a project if the present value ofall future cash inflows minus the present value of all cash outflows (which equals the netpresent value) is greater than zero. The key inputs of the calculation of NPV are the interest rate or discount rate which isused to compute present values of future cash flows. If the discount rate exceeds theshareholders required rate of return is exceeded by the discounting rate, and the project also got a positive NPV at that rate,then shareholders will be expect an additional profit that has a present value equal to the NPV. Thus if the main objective of the organization is to maximizing the wealth of the shareholder, then managers have to undertake that projects only which have a positive NPV, or would choose the higher NPV projectif faced with two or more mutually exclusive positive NPV projects. NPV analysis is very sensitive to the dependability of expected future cash inflows that an investment or project will yield. Itsformula is:

Where Ct is the cash flow at time t, Co is the cash outflow at time 0 and ris the discount rate. This technique essentially compares the value of a rupee today to the value in the future, taking inflation and returns into consideration. Academics have endorsed the acceptance of prospective projects with positive NPV. However, if NPV is negative, the project should be rejected because of negative cash flows. Negative NPV projects would essentially mean value destruction for shareholders.

1.2.2 Internal Rate of Return (IRR)

The internal rate of Return (IRR) is the discount rate that equals the present value of afuture steam of cash flows to the initial investment. In simple words, discount rate is therate at which the proposed investment project gets evaluated and gives the net present value of a project which is equals to zero. Internal rate of return can also be termed as theannualized rate of return (in percent) of an investment using compound interest ratecalculations. The IRR decision rule specifies that all independent projects with an IRR greater than the cost of financing the project will be favourable and that project should be accepted. When organization is planning to choose among the various mutually exclusiveprojects, the project which gives more return as compare to other project or project with the highest IRR should be selected (as long as the IRR isgreater than the cost of capital). The determination of the IRR for a selected project, usually,involves trial and error or a numerical technique. Mathematically,

Where CFt = the cash flow at time t. The IRR can be easily computed on excel by using its inbuilt function or solver. 1.2.3 Profitability Index (PI) It is another method of evaluating the investment proposals. It is also termed as time adjusted method of evaluating the proposals. Profitability index refers to the ratio of the discounted value of the expected future cash flows, at the required rate of return i.e. present value of cash inflows to the initial cash outflow of the investment. This can be determined by:

1.2.4 Payback (PB) The payback method of capital budgeting is used for evaluating the investment proposals, Payback method computes the annual returns from the beginning of the project and it

accumulates the returns until the returns equates to the cost of the investment which is invested at the beginning. The time required to reach the payback is termed the payback period. The required payback period sets the hurdle rate (threshold barrier) for the acceptance of the projectunder this Payback method. The PB method is generally used as a comparison of two or more projects and has a wide acceptance as a rule of thumb. This can be determined by:

1.2.5 Discounted Payback This method is very similar to payback method, but the difference between these two methods is payback does not discount the expected future cash flows for calculating the payback period. The discounted payback period refers to the number of periods needed to recover the investment outlay on the present value basis. 1.2.6 Accounting Rate of Return The accounting rate of return (ARR), computed from the financial statements. ARR is an ex post and periodic indicator. It is commonly defined as the ratio of accounting profit earned in a particular period to the book value of the capital employed in the given period. According to the various numerators and denominators that applied to calculate ARR, there are several types of definitions used in analysis. When the numerator of ARR is concerned, it is usually financial annual accounting income or profit, whereas the denominator is usuallycomputed by book value of assets or book value of equity. This can be determined by:

1.3 Sophisticated capital budgeting techniques

1.3.1 Real Option Valuation

Real option refers to evaluation technique in which an investment is evaluated where a choice or an alternative become available with business investment opportunities. It can also include opportunities to cease and expand if some specific conditions arise amongst other option. Options are considered as real because they normally pertain to real/tangible assets such as, capital equipment. Real option can affect the valuation of potential investments. Real option applies to capital budgeting decisions. Real option gives the right but not the obligation to undertake specific business activities such as abandoning, deferring, staging, expanding or contracting a capital investment project. Options relating to project size Option to expand Option to contract Option to expand or contract

Option relating to project life Initiation Option to abandon Sequencing option

1.3.2 Value Based Management It is an approach to management that aligns a company's overall aspirations, analytical techniques, and management processes to focus management decision making on the key drivers of value.VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating decisions. 1.3.3 Sensitivity Analysis Sensitivity analysis is a capital budgeting techniques that used todetermine the impact of the different values of an independent variableunder a given set of assumption on a particular dependent variable. This technique will depend on one or more input variables can be used within the specific boundaries, such as the effect on the bonds price due to the change in interest rates. It is a way to predict the outcome of the decision if predicted situation turns out to be different.

CHAPTER 3

Research methodology

3.1 Introduction:
In this section, we shall discuss about the methodology used in conducting the research on thecapital budgeting practices in India.We will first identify the different methodologiesand techniques used for research purposes and explain the use of particular methods ina given scenario. We then discuss and analyse the specific method to be used for thepurpose of our analysis following which we finally take a brief understanding of thequestionnaire design, distribution and data collection method. 3.2 Problem Statement A study on capital budgeting practices in India

3.3 Variables under Investigation

3.3.1 Dependent variables 3.3.1.1 Unsophisticated capital budgeting technique Net Present Value Internal Rate of return Payback Discounted Payback Accounting Rate of Return Profitability Index

3.3.1.2 Sophisticated capital budgeting technique Real Option Analysis Value Based Management Sensitivity Analysis

3.3.1.1.1 Net Present Value This method is the classic economic method of evaluating the investment proposals. It is a DCF technique that recognizes time value of money. 3.3.1.1.2 Internal Rate of Return This is another DCF technique, which takes account of the magnitude and timing of cash flows.

3.3.1.1.3 Profitability Index It is the ratio of the present value of cash inflows at the required rate of return, to the initial cash outflow of the investment. 3.3.1.1.4 Payback This is most commonly widely used non-discounted cash flow technique of evaluating investment proposals. It is the number of years required to recover the original cash outlay invested in a project. 3.3.1.1.5 Discounted Payback It is the number of period taken in recovering the investment outlay on the present value basis. 3.3.1.1.6 Accounting Rate of Return It is also known as ROI, it uses the accounting information as revealed by the financial statement to measure the profitability of an investment. 3.3.1.2.1 Real Option Analysis Real option refers to evaluation technique in which an investment is evaluated where a choice or an alternative become available with business investment opportunities. 3.3.1.2.2 Value Based Management It is an approach to management that aligns a company's overall aspirations, analytical techniques, and management processes to focus management decision making on the key drivers of value. 3.3.1.2.3 Sensitivity Analysis Sensitivity analysis is a capital budgeting techniques that used todetermine the impact of the different values of an independent variableunder a given set of assumption on a particular dependent variable. 3.3.2 Independent variables Age of the financial officer Qualification of the financial officer Asset size of the organization

Tenure of the organization Change in working capital and availability of the fund.

3.4 Hypothesis
3.4.1 Hypothesis 1 H0: Financial officers who are young do not prefer to use more sophisticated techniques than older financial officers. H1: Financial officers who are young prefer to use more sophisticated techniques than older financial officers. 3.4.2 Hypothesis 2 H0: Financial officers who are more qualified do not prefer to use more sophisticated capital budgeting techniques. H1: Financial officers who are more qualified prefer to use more sophisticated capital budgeting techniques. 3.4.3 Hypothesis 3 H0: Larger firmdo not prefer to use more sophisticated capital budgeting techniques. H1: Larger firm prefer to use more sophisticated capital budgeting techniques. 3.4.4 Hypothesis 4 H0: Older firms do not tend to use more sophisticated techniques than young companies. H1: Older firms tend to use more sophisticated techniques than young companies. 3.4.5 Hypothesis 5 H0: Change in working capital does not influence the capital investment decisions H1: Change in working capital influence the capital investment decisions

3.5 Objective
This research is mainly focuses on the capital budgeting practices and tools using by the organization. The main aim of this research is to identify the capital budgeting techniques that are usually used by the organization on the basis of the size and tenure of the organization and qualification of their financial officers.

3.6 Data Type

3.6.1 Primary Data Questionnaire 3.6.2 Secondary Data Research Journals Articles & Websites Books

3.7 Sample Design

The study would be conducted in small and large firms in the country. The aim is to conduct study in more than 100 companies across the country. A sample would be drawn accordingly.

3.8 Sample Type

The type of sampling used is non-probability convenience sampling.

3.9 Data Analysis

Different scales have been used in the questionnaire. Different statistical tools will be used for the data analysis depending upon the sample size. Descriptive Frequency test and Correlation analysis would be conducted with the help of SPSS.

3.10 Limitations of the study

1. Drawing out a sample of a small population. 2. Time constraint is a major limitation of the study. 3. While the survey mailed to the CFO, the responses are the opinion of anindividual which may not completely reflect the firms position. 4. It is possible that theresponding person may not be the best to assess the capital budgeting process. 5. There is also potential concern about a bias response.

CHAPTER 4

Industry overview

4.1 Capital Budgeting: An overview

Financial management is mainly concerned with investment, financing and dividend decisions of the firm keeping in mind the overall objectives of the firm. Corporate finance theory has been developed around maximizing the value of shareholders wealth and market value of the firm. This is even known as shareholders wealth maximization. Though various goals or objectives can be achieved in the field of finance, the most commonly accepted objective of the firm is to increase or maximize the value of the firm to its owners.(Don Dayananda, 2014) Financing decision generally deals with capital structure of the firm and it is more focused on optimal capital structure in terms of debt and equity. Dividend decisions refer to the form where firm passed on the generated returns to equity-holders. Investment decisions refer to the firms investment activity in which firm raised the funds in financial market and employed the same in operation to attain its overall goal; in other words, how much to be invested and on what assets should be invested.(Don Dayananda, 2014) Capital budgeting is mostly concerned with the ample investments in long-term assets. These assets can be tangible or intangible. Tangible assets are machines, plant or property and intangible assets are patents, copyrights, trademarks etc. Firm also invest in the process such as testing, design, research and development through which new products or technology are created this is also viewed as intangible assets.(Don Dayananda, 2014) Capital investments can be distinguished from recurrent expenditures by two important features. One is that the project is considerably large and the other is long-lived nature of the project with their cash flows spreading over long period. Ample and long term investments in either tangible or intangible assets have long-term consequences. These investments also impact the future cash flows of the organization and the risk associated with it. An investment today will determine the strategic position of the firm for many years. Thus, capital budgeting decisions have significant impact on the performance of the firm for longer duration and are very critical to the firms success or failure. (Don Dayananda, 2014)

4.1.1 Capital Budgeting

Figure 4.1: Corporate goal, financial management and capital budgeting. GOAL OF THE FIRM Maximize shareholder wealth or value of the firm

Financing Decision

Dividend Decision

Investment Decision

Long-term Investment

Short-term Investment

Capital Budgeting
(Don Dayananda, 2014)

4.2 Shareholder wealth maximization and net present value

Financial managements efficiency is judged by its success in achieving the firms objective. The objective of shareholder wealth maximization states that management should attempt to maximize the net present value of the expected future cash flows to the firms shareholders. Net present value refers to the discounted sum of the future cash flows, some of the cash flows such as capital outlays are called cash outflows and some such as proceeds from sales are called cash inflows. The discounting factor i.e. discount rate considers the risk and timing of the future cash flows that are available from an investment. Thus the shareholder wealth maximization reflects the timing, magnitude and risk associated with the cash flows that is expected to be received in the future. (Don Dayananda, 2014)

4.3 Capital Budgeting Process

Corporate Goal

Strategic planning

Investment opportunities

Preliminary screening

Financial appraisal, quantitative analysis, project evaluation or project analysis

Qualitative factors

Accept/reject decisions

Accept

Reject

Implementation

Facilitation, monitoring, control and review

Continue, expand or abandon project

Post implementation audit Figure 4.2: Capital budgeting process (Don Dayananda, 2014)

4.4 Capital budgeting: Global perspective

Capital budgeting techniques appears in the view of financial managers of global companies is that, basic techniques are in stronger agreement than ever before. Discounting capital budgeting techniques are generally preferred more over the non-discounting techniques. It has also found that net present value is being the most frequently capital budgeting technique of choice, followed by the IRR. Organizations, looking for investment with larger capital budget likely to favour NPV and IRR. Capital budgeting techniques have now become a strategic for the successful analysis of mergers and acquisitions, purchase of land and equipment, expansion etc. Most of the utility companies are now incorporating IRR, NPV and PBP as a capital budgeting techniques into their system. IRR and NPV have gained so much importance in last ten years, whereas there is a significant decline the use of PBP. Though sophisticated capital budgeting has more importance while evaluating investment proposals, it has appears that a negative capital budgeting analysis often overruled when it reaches the decision stage.

4.5 Capital budgeting: Indian perspective

As far as the companys growth and productivity is concerned, capital budgeting has been given utmost importance. Manager need to be serious regarding the capital budgeting process to keep company away from the financial problems. Proper care need to be taken while evaluating projects as large scale companies are involved in the large projects which requires large amount of capital investments. Financial officers who involved in the capital budgeting process of large companies are highly qualified and well experience. NPV has found to be used techniques by the large companies, even more than IRR. Earlier IRR had preferred more than NPV. Some large companies in India are making use of DCF capital budgeting techniques and it has also seen that the companies are unwilling to make use of modern methods such as real options. This technique is of greater importance to the manager as consider the strategic factor and managerial factors which are ignored by the DCF techniques. (Poll, 2012) Small companies use less sophisticated techniques than those which are recommended by the capital budgeting theory to analyse the potential of the investments. Many small-business owners have very limited knowledge and their firm also have incomplete management teams which leads lack of financial sophistication that becomes a major reason why preference of small companies towards capital budgeting differ from the recommendations of theory. Capital

budgeting practices in small firm is also affected by the small staff size of the company. Other reason why small firm do not use sophisticated method is they do not operate in the capital markets. (Scot, 2014) 4.5.1 Reason behind the use of these methods: 4.5.1.1 Net Present value

It is said to be superior as it considers the time value of money and also adjusts for the risk factor.

It is line with the company policy and it also enables the company to determine the viability of the project.

4.5.1.2 Internal Rate of Return

It indicates the actual return of each project. It also enables manager to know whether or not an investment will increase the value of the company.

It considers all the cash flows and takes into consideration the time value of money.

4.5.1.3 Payback

It is easy to use and understand It is normally used for small projects. It reduces costs because of its simplicity. (Poll, 2012)

4.6 Risk analysis in capital budgeting

4.6.1 There are several types of risks that are faced by company in capital budgeting: International risk Project specific risk Industry specific risk Stand-alone risk Corporate risk Competitive risk Market risk

4.6.2 The following are the methods that used for Risk Analysis in Capital Budgeting:

Sensitivity Analysis Sensitivity analysis can be used when company is uncertain about the future and wants to know about the feasibility of the project. Feasibility of the project can be found in variable quantities, this is calculated in terms of NPV. It is also called as what if analysis. Scenario Analysis This analysis gives more attention to the change in one defined variable at a given point of time. It is far different from the sensitivity analysis, which generally concentrates on the variation of a number of interconnected variables. Break Even Analysis The Break even analysis helps company to identify or determine the exact minimum production and sales required to avoid losing any money. Break-even can be obtained through this analysis where company get to know the minimum possible quantity which no loss could be occurs. Decision Tree Analysis This analysis helps in assessing the alternative of a particular scenario and identifying the potential of the same. Corporate Risk Analysis This analysis mostly focuses on the identification and analysis of the risk that may affect the cash flow of the firm. Risk Management: Risk management concentrate on various factors such as sequential investment, pricing strategy, insurance, fixed and variable costs, financial leverage, derivatives, strategic alliance, long term arrangements and improvement of information. (World, 2014) Practical Risk Analysis: The techniques involved include the margin of safety in cost figures, acceptable overall certainty index, flexible investment yardsticks, conservative revenue estimation and judgment on three point estimates. (World, 2014)

CHAPTER 5

DATA ANALYSIS AND INTERPRETATION

5.1 INTRODUCTION
With respect to the background studies made in chapter 2 and 3 (Literature Review and Research Methodology respectively) and overview of practices in the area of Capital Budgeting made in Chapter 4 (Industry Overview), the researcher presents an analysis of various variables considered under this study. The complete breakup of the chapter consists of profile of respondents and completes analysis of the primary data.

5.2 RESPONDENT PROFILE

5.3 PRIMARY DATA ANALYSIS AND INTERPRETATION

Table 5.3.1: Frequency of age wise respondents of real option technique Crosstab Count Age Less than 30 30 to 35 35 to 40 40 to 45 45 to 50 More than 50 Real1 Total Analysis: From the26 respondents, 18 say no to prefer real option valuation as capital budgeting tools. 8 respondents agree to prefer real option valuation as a capital budgeting tool. Out of the 8 respondents who agree using real option, 4 respondents are in the age group of 35 to 45 years. 2 respondents are aged more than 45 hence we can infer that the use of this tool increases as per the age. When considering the percentages only 10% of young respondents agree to prefer real option. On the other hand 44.44% of the respondent above the age of 40 use real option. No Yes 9 1 10 3 1 4 1 2 3 2 2 4 1 1 2 2 1 3 Total 18 8 26

Figure 5.3.1: Age wise responses of real option technique

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically significant proportion of young respondents avoid using the real value option techniques whereas the older respondents prefer using this technique.

Table 5.3.2: Frequency of age wise respondents of value based management Crosstab Count Age Less than 30 30 to 35 35 to 40 40 to 45 45 to 50 More than 50 VBM1 No Yes Total 9 1 10 4 0 4 2 1 3 1 3 4 1 1 2 2 1 3 Total 19 7 26

Analysis: From the26 respondents, 19 say no to prefer value based management as capital budgeting tool. 7 respondents agree to prefer value based management as a capital budgeting tool. Out of the 7 respondents who agree using value based management, 4 respondents are in the age group of 35 to 45 years. 2 respondents are aged more than 45 hence we can infer that the use of this tool increases as per the age. When considering percentages only 10% of young respondents agree to prefer value based management. On the other hand 55.55% of the respondent above the age of 40 prefer value based management. Figure 5.3.2: Age wise responses of value based management

Interpretation:

The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically significant proportion of young respondents avoid using the value based management techniques whereas the mid-age respondents prefer using this technique.

Table 5.3.3: Frequency of age wise respondents of sensitivity analysis Crosstab Count Age Less than 30 30 to 35 35 to 40 40 to 45 45 to 50 More than 50 Total Sensitivity1 No Yes Total 7 3 10 3 1 4 1 2 3 2 2 4 1 1 2 1 2 3 15 11 26

Analysis: From the26 responses, 15 say no to prefer using sensitivity analysis as capital budgeting tool. 11 respondents agree to prefer sensitivity analysis as a capital budgeting tool. Out of the 11 respondents who agree using sensitivity analysis, 4 respondents are in the age group of 35 to 45 years. 3 respondents are aged more than 45 hence we can infer that the use of this tool increases as per the age. When considering percentages only 28.5% of young respondents agree to prefer sensitivity analysis, 57.14% of the mid-age respondents and 60% of the older respondents prefer sensitivity analysis.

Figure 5.3.3: Age wise responses of sensitivity analysis

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically significant proportion of older respondents prefer using sensitivity analysis.

Table 5.3.4: Frequency of qualification wise respondents of real option Crosstab Count Qualification MBA Real1 Total Analysis: From the26 respondents, 18 say no to prefer real option valuation as capital budgeting tools. 8 respondents agree to prefer real option valuation as a capital budgeting tool. Out of the 8 respondents who agree using real option, 6 respondents are highly qualified whereas 2 respondents are less qualified as compared to the 6 other respondents. When considering the percentages only 40% of highly qualified respondents agree to prefer real option. On the other hand only 28.17% of the less qualified respondent prefers to use real option. No Yes 5 2 7 CA/ICWA 4 4 8 B.Com 5 2 7 Others 4 0 4 Total 18 8 26

Figure 5.3.4: Qualification wise responses of real option technique

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically significant proportion of highly qualified respondents prefer using the real value option techniques.

Table 5.3.5: Frequency of qualification wise respondents of value based management Crosstab Qualification MBA VBM1 Total No Yes 5 2 7 CA/ICWA 6 2 8 B.Com 5 2 7 Others 3 1 4 Total 19 7 26

Analysis: From the26 respondents, 19 say no to prefer value based management as capital budgeting tool. 7 respondents agree to prefer value based management as a capital budgeting tool. Out of the 7 respondents who agree using value based management, 4 respondents are highly qualified whereas 3 respondents are less qualified as compared to the 4 other respondents. When considering percentages only 26.67% of highly qualified respondents agree to prefer value based management whereas on the other hand 27.77% of the less qualified respondents prefer to use this technique.

Figure 5.3.5: Qualification wise responses of value based management

Interpretation:

The graph provides a pictorial representation of the data and analysis discussed above. A clear inference about the affinity towards this tool cannot be drawn in this case.

Table 5.3.6: Frequency of qualification wise respondents of sensitivity analysis Crosstab Count Qualification MBA Sensitivity1 Total No Yes 3 4 7 CA/ICWA 4 4 8 B.Com 5 2 7 Others 3 1 4 Total 15 11 26

Analysis: From the26 responses, 15 say no to prefer using sensitivity analysis as capital budgeting tool. 11 respondents agree to prefer sensitivity analysis as a capital budgeting tool. Out of the 11 respondents who agree using sensitivity analysis, 8 respondents are highly qualified and3 respondents are not much qualified as compare to 11 other respondents. When considering percentages53.33% of highly qualified respondents agree to prefer sensitivity analysis, whereas only 27.17% of less qualified respondents prefer sensitivity analysis.

Figure 5.3.6: Qualification wise responses of sensitivity analysis

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically significant proportion of highly qualified respondents prefer using sensitivity analysis.

Table 5.3.7: Frequency of size wise respondents of real option Crosstab Count Total Assets <50 million Real1 No Yes Total Analysis: From the26 respondents, 22 say no to prefer real option valuation as capital budgeting tools. 4 respondents agree to prefer real option valuation as a capital budgeting tool. Out of the 4 respondents who agree using real option, 3 respondents are larger in size whereas1 respondent is very small as compared to the 3 other respondents. When considering the percentages only 33.33% of larger firms agree and only 7% of small companies prefer to use real option. 5 1 6 50-100 million 7 0 7 100 - 150 million 1 0 1 150-200 million 3 0 3 >200 million 6 3 9 Total 22 4 26

Figure 5.3.7: Size wise responses of real option technique

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically significant proportion of large size companies prefer using the real value option techniques.

Table 5.3.8: Frequency of size wise respondents of value based management

Crosstab Count Total Assets <50 million VBM1 No Yes Total 4 2 6 50-100 million 6 1 7 100 - 150 million 1 0 1 150-200 million 3 0 3 >200 million 9 0 9 Total 23 3 26

Analysis: From the26 respondents, 23 say no to prefer value based management as capital budgeting tool. 3 respondents agree to prefer value based management as a capital budgeting tool. Out of the 3 respondents who agree using value based management, all the 3 respondents belongs to organization which are smaller in size. When considering percentages only 22.07% of small size firms agree to prefer value based management whereas on the other hand no large and medium size firm prefer to use this technique. Figure 5.3.8: Size wise responses of value based management

Interpretation:

The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically small proportion of small size companies prefer using the value based management techniques whereas the medium and large size firm do not prefer to use this technique. The overall usage of this technique is pretty low.

Table 5.3.9: Frequency of size wise respondents of sensitivity analysis Crosstab Count Total Assets <50 million Sensitivity No 1 Yes Total Analysis: From the26 responses, 18 say no to prefer using sensitivity analysis as capital budgeting tool. 11 respondents agree to prefer sensitivity analysis as a capital budgeting tool. Out of the 8 respondents who agree using sensitivity analysis, 5 respondents belongs to organization that are smaller in size and rest 3 respondents belongs to the organization that are larger in size. When considering the percentages 38.46% of small firms and 33.33% of large firms agree to prefer sensitivity analysis, whereas on the other hand no medium size firm prefer to use this technique. 3 3 6 50-100 million 5 2 7 100 - 150 million 1 0 1 150-200 million 3 0 3 >200 million 6 3 9 Total 18 8 26

Figure 5.3.9: Size wise responses of sensitivity analysis

Interpretation:

The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that both new and old firms prefer to use sensitivity analysis as a capital budgeting technique whereas the medium size firm do not prefer to use this technique.

Table 5.3.10: Frequency of tenure wise respondents of real option Crosstab Count Tenure <5 Real1 Total Analysis: From the 26 respondents, 18 say no to prefer real option valuation as capital budgeting tools. 8 respondents agree to prefer real option valuation as a capital budgeting tool. Out of the 8 respondents who agree using real option, 5 respondents are those who are new in the organization and 3 respondents are who have spent considerably older than the other 3 respondents prefer to use real option technique whereas financial officer who are there in the organisation for more than 20 years do not prefer to use this technique. When considering the percentages only 27.77% of respondents who spent less time in the organization and 75% of the respondents who are there in the organisation for 10 to 20 years agree to prefer real option. Figure 5.3.10: Tenure wise responses of real option technique No Yes 10 2 12 5-10 3 3 6 10-15 1 1 2 15-20 0 2 2 >20 4 0 4 Total 18 8 26

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically small proportion of respondents who spent 1 to 10 years and statistically significant proportion of respondents who spent 10 to 20 years in the organization prefer using the real value option whereas financial officer who are there in the organisation for more than 20 years do not prefer to use this technique.

Table 5.3.11: Frequency of tenure wise respondents of value based management Crosstab Count Tenure <5 VBM1 Total Analysis: From the26 respondents, 19 say no to prefer real option valuation as capital budgeting tools. 7 respondents agree to prefer real option valuation as a capital budgeting tool. Out of the 7 respondents who agree using real option, 4 respondents are those who are new in the organization and 2 respondents are those who have spent considerably more time than the other 3 respondents and only 1 respondent who are much older there in the organisation for more than 20 years prefer to use this technique. When considering the percentages only 22.22% of respondents who spent less time in the organization, 50% of the respondents who are there in the organisation for 10 to 20 years and only 25% of the respondents who are there in the organisation for more than 20 years prefer to use this technique. Figure 5.3.11: Tenure wise responses of Value based management No Yes 10 2 12 5-10 4 2 6 10-15 1 1 2 15-20 1 1 2 >20 3 1 4 Total 19 7 26

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically small proportion of all the respondents groups prefer to use this technique.

Table 5.3.12: Frequency of duration wise respondents of sensitivity analysis Crosstab Count Tenure <5 Sensitivity1 Total Analysis: From the26 respondents, 15 say no to prefer real option valuation as capital budgeting tools. 11 respondents agree to prefer real option valuation as a capital budgeting tool. Out of the 11 respondents who agree using real option, 6 respondents are those who are new in the organization and 4 respondents are those who have spent considerably more time than the other 6 respondents and only 1 respondent who spent more than 20 years prefer to use this technique. When considering the percentages only 33.33% of respondents who spent less time in the organization, 100% of the respondents who are there in the organisation for 10 to 20 years and only 25% of the respondents who are there in the organisation for more than 20 years prefer to use this technique. Figure 5.3.12: Tenure wise responses of sensitivity analysis No Yes 9 3 12 5-10 3 3 6 10-15 0 2 2 15-20 0 2 2 >20 3 1 4 Total 15 11 26

Interpretation: The graph provides a pictorial representation of the data and analysis discussed above. Here we can conclude that a statistically small proportion of all the respondents groups prefer to use this technique.

Table 5.3.13: Factors affecting capital investment decisions

Statistics Ch. WC N Valid Missing Mean Mode Std. Deviation Skewness Std. Error of Skewness Range Percentile 25 s 50 75 Analysis: From the above table we can conclude that change in working capital and fund availability is the most important factors that affect the capital investment. This can be inferred as their means are significantly higher than the means of other factors. Figure 5.3.13: Changes in working capital 26 0 4.15 5 .925 -.984 .456 3 4.00 4.00 5.00 Fund 26 0 4.27 5 .778 -.527 .456 2 4.00 4.00 5.00 Size Project 26 0 3.96 4 .958 .456 4 4.00 4.00 5.00 Tax 26 0 3.81 4 .939 .456 4 3.00 4.00 4.00 Politica Urgenc l y 26 0 3.08 3 .935 .156 .456 4 2.75 3.00 4.00 26 0 3.23 3 .863 -.486 .456 4 3.00 3.00 4.00 Other Factors 26 0 2.96 3 1.113 -.108 .456 4 2.00 3.00 4.00

-1.396 -1.157

Interpretation: Average rating for change in working capital is 4.15 and standard deviation is 0.925. Therefore, 68% of the responses lie between 3.225 and 5.

Figure 5.3.14 Fund availability

Interpretation: Average rating for fund availability is 4.27 and standard deviation is 0.778. Therefore, 68% of the responses lie between 3.492 and 5.

Table 5.3.14: Multi-collinearity between variables Proximity Management Correlation between Vectors of Values Ch. WC Fund Avail Size Project Ch. WC Fund Avail Project Size Tax Political Urgency Other Factors 1.000 .329 .052 .542 .263 -.247 .200 .329 1.000 .068 .183 .301 -.037 -.172 .052 .068 1.000 .080 -.220 .543 .224 Tax .542 .183 .080 1.000 .473 -.289 .299 Political Urgency Other Factors .263 .301 -.220 .473 1.000 -.320 .195 -.247 -.037 .543 -.289 -.320 1.000 .343 .200 -.172 .224 .299 .195 .343 1.000

This is a similarity management Analysis and Interpretation: A correlation management of all the predictor variables is presented. It is found that some of the inter-correlation among the predictor variables is very high leading to the problem of multicollinearity which will have its adverse impact while judging the relative contributions of each variable towards the capital investment decisions. There collinearity between change in working capital and tax implication hence we consider fund availability is the most important factors that influence the capital investment decisions.

5.4 TESTING OF HYPOTHESIS

5.4.1 Hypothesis H0: Financial officers who are young do not prefer to use more sophisticated techniques than older financial officers. H1: Financial officers who are young prefer to use more sophisticated techniques than older financial officers. Result: The results discussed in the articles where tables 5.1, 5.2, 5.3 are discussed it can be clearly inferred that the null hypothesis can be accepted. Hence the alternate hypothesis is rejected. In fact the usage of the sophisticated techniques increases with the increase in age and experience.

5.4.2 Hypothesis H0: Financial officers who are more qualified do not prefer to use more sophisticated capital budgeting techniques. H1: Financial officers who are more qualified prefer to use more sophisticated capital budgeting techniques. Result: The results discussed in the articles where tables 5.4, 5.5 and 5.6 are discussed it can be clearly inferred that the null hypothesis can be rejected, hence the alternate hypothesis is accepted. So we can conclude that the usage of the sophisticated techniques is mostly prefer by the highly qualified financial officer.

5.4.3 Hypothesis H0: Larger firm do not prefer to use more sophisticated capital budgeting techniques. H1: Larger firm prefer to use more sophisticated capital budgeting techniques. Result: The results discussed in the articles where tables 5.7, 5.8, and 5.9 are discussed it can be clearly inferred that the null hypothesis can be rejected hence the alternate hypothesis is accepted. So we can conclude that the use of sophisticated techniques is mostly preferred by the larger firms.

5.4.4 Hypothesis H0: Older firms do not tend to use more sophisticated techniques than young companies. H1: Older firms tend to use more sophisticated techniques than young companies. Result: The results discussed in the articles where tables 5.10, 5.11, and 5.12 are discussed, it can be clearly inferred that the null hypothesis can be rejected hence the alternate hypothesis is accepted. So we can conclude that the usage of the sophisticated techniques increases with the increase in tenure of the organization.

5.4.5 Hypothesis H0: Change in working capital does not influence the capital investment decisions H1: Change in working capital influence the capital investment decisions Result: The results discussed in the articles where table 5.13 are discussed, it can be clearly inferred that the null hypothesis can be rejected hence the alternate hypothesis is accepted. So we can conclude that change in working capital and fund availability is the most important factors that affect the capital investment. This can be inferred as their means are significantly higher than the means of other factors.

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