Perspectives on capital budgeting in the South African motor manufacturing industry

Abstract

Purpose

Capital budgeting is a key issue in corporate finance and over time major theoretical developments have been incorporated into the appraisal processes of capital intensive companies. The purpose of this paper is to investigate the capital budgeting practices of a sample of motor manufacturing companies in South Africa and compare the empirical findings to the existing literature in order to establish whether the theoretical aspects are still widely practiced.

Design/methodology/approach

Semi‐structured personal interviews were conducted with respondents at eight motor manufacturers in the Eastern Cape and Gauteng provinces of South Africa.

Findings

The net present value (NPV) and internal rate of return criteria are the two most popular appraisals methods used in practice. Most respondents used multiple criteria before making substantial capital investments. These findings conform to contemporary capital budgeting theory.

Practical implications

Financial managers should first calculate the discounted payback period of a project before embarking on a more detailed analysis. Once all the data are available, NPV should be used as the primary means of evaluating investments, as this criterion gives the best indication of how much shareholder value the project will add. It is further recommended that more attention be given to “green” considerations in the capital budgeting process.

Originality/value

The paper evaluates the applicability of existing literature on capital budgeting to the practice thereof in a capital intensive industry in South Africa. No similar study has been done previously.

Citation

Viviers, S. and Cohen, H. (2011), "Perspectives on capital budgeting in the South African motor manufacturing industry", Meditari Accountancy Research, Vol. 19 No. 1/2, pp. 75-93. https://doi.org/10.1108/10222521111178646