Perceptual Mapping of Capital Budgeting Techniques: Empirical Evidence from Corporate Enterprises in India

Abstract

The study aempts to map practitioner's perception towards varying aributes [incorporation of time value of money (TVM), reflection of all relevant cash flows (RCF), consistency with the goal of shareholders' wealth maximization (WM) and efficient reinvestment of intermediate cash flows (RICF)] of competing capital budgeting techniques. For the purpose, responses have been elicited from CFO/Finance managers of 126 non-financial companies of CNX 200 index. For an in-depth analysis, capital budgeting decisions have been divided in four categories (based on the purpose). Findings indicate that CFO's use both discounted and non-discounted techniques but perceive ARR and payback techniques as the most consistent techniques in context of goal of wealth maximization. It may be mentioned that NPV and IRR emerge as the most preferred techniques. In addition, perceptual map (based on principal component analysis (PCA)) reveals that the practitioners consider most of the features of a sound (conceptually) capital budgeting technique, but somehow are unable to associate the aributes with the relevant technique. The perceived association of goal of wealth maximization with ARR and PBP is the most disappointing finding. In short, the consistency between preference and perception has magnified the theory practice gap. The study is expected to pave path for exploration of more such intriguing aspects related to decision making in financial management.