CAPITAL BUDGETING AND FINANCIAL MANAGEMENT IN INVESTMENT DECISIONS: AN ILLUSTRATIVE STUDY

Okeniyi Oke
Business Services and Statistical Consulting

Lamine J. Conteh
Southwest Minnesota State University

ABSTRACT

Effective project analysis is essential to the optimization of creative, strategic, and
thoughtful financial management investment decision-making. Capital budgeting techniques-a
process in an enterprise’s long- term investment planning, lie at the core of such financial
decision analysis. The purpose of this study is to examine techniques in conducting investment
decision analysis through capital budgeting. In particular, the illustrative methods for comparison
and choice of decision criteria used in the analysis include: (1) Accrual rate of return (AROR), (2)
Benefit-Cost (B-C) ratio method, (3) payback period, (4) Net present value (NPV), (5) Internal
Rate of Return (IRR), and (6) sensitivity analysis methods. Study evidence found an inverse
relationship between NPV yields from the discounted cash value evaluations. To the extent that,
lower interest rates provided higher resultant discounted cash values for NPV derivations. While
higher interest rates gave lower, reverse NPV yields. Thus, highlighting the preeminence and
significance of interest rates in the cost of capital determination for long-term project profitability
as well as sustainability. Study findings, policy implications and limitations for investment
decisions are finally highlighted.

Keywords: Capital budgeting, accrual rate of return, benefit-cost ratio, payback method, net present value
internal rate of return, sensitivity analysis