Last Updated 02 Aug 2020

Capital Budgeting Practices in Asia-Pacific

Words 268 (1 page)

A study on capital budgeting has been conducted to evaluate the understanding of executives on issues relative to corporate financial policy (Kester, G. W. , et. al, 1999). Cited from the conclusion of Kester, et. al, the multinational corporations in the Philippines, Indonesia, Malaysia, Singapore, Hong Kong and Australia are relatively facing the issues of inconsistency of managerial practices in incurring cost to train employees and implementation of new practices in areas of capital budgeting techniques. Kester, et. al, further found out the following concerns:

Quantitative evaluation techniques in the Asia-Pacific region are similar to their Western counterparts. Executives consider Discounted Cash Flow (DCF) techniques such as net Present Value (NPV) and Internal Rate of Return (IRR) to be more important than non-DCF techniques for evaluating and ranking capital investment projects. Preferred the use of situational and sensitivity analysis to assess risk. Use of discount hurdle rates for project evaluation differs with each country. Conflict on basic principle of finance theory; e. g. ROI should reflect the investment risk.

Only half of the Philippine executives indicated that their companies use multiple risk adjusted discount rates and less than half use multiple rates. Conflicts with the rationale behind Weighted Average Cost of Capital (WACC); i. e. investment projects are financed from pool of funds, as opposed to being financed out of debt, preferred stock, or common stock. The CAPM has yet to become widely adopted in the Asia-Pacific region for estimating the cost of equity capital. The CAPM is less popular as a technique to determine project discount rates based upon project beta which is not used at all by the companies.

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