The Effect of Capital Budgeting Decisions on the Financial Performance of Manufacturing Firms Listed at the Nse

Abstract

The individuals involved in making capital budgeting decisions are assumed to be rational in their investment decisions. However, in reality human irrationality can affect the capital budgeting decisions made. This results from divergence of individual goals from the goals of the firm. It is as a result of this irrationality that capital budgeting is being viewed as an inconvenient tool for shareholders wealth maximization goal. The study aimed to determine the effect of capital budgeting decisions on the financial performance of manufacturing firms listed at the Nairobi Securities Exchange. 9 manufacturing firms listed at the NSE formed the population for the study. Both primary and secondary data were relied on as means of data collection. Data was collected for the period 2012 to 2017. Secondary data was obtained from the financial statements of the listed firms while primary data employed questionnaires in data collection. MS Excel and SPSS software were employed in the analysing of the data collected. The study found that the manufacturing companies employed the capital budgeting tools in their investment decisions. NPV was the most used capital budgeting tool. NPV was followed by IRR, PBP was third and ARR was the least utilized tool. Regression results revealed that all the capital budgeting techniques (NPV, IRR, ARR and PBP) were non-statistically significant related to financial performance of manufacturing firms, with NPV and PBP producing weak negative results and IRR and ARR producing weak positive results. From the findings outlined above, the study recommends that manufacturing firms should consider; Training of their employees in the use of the aforementioned capital budgeting tools, Evaluate projects viability by ranking them in terms of priority before sourcing for external funding, Creation of a separate department to deal with the identification of viable projects and the selection of appropriate capital budgeting tools mix and consider obtaining a mix of traditional and modern capital budgeting techniques that would help the firm reduce the risks of project failure.