The relationship between capital budgeting methods and performance of water services boards in Kenya

Abstract

One management practice which has been widely adopted by corporations is capital budgeting. The current study sought to establish the relationship between capital budgeting methods and performance of Water Services Boards in Kenya. The study was guided by the following specific objectives:- to identify the capital budgeting techniques employed by the Water Services Boards in Kenya; to establish the factors that influence the choice of the capital budgeting techniques used by the Water Services Boards in Kenya; and to establish the relationship between capital budgeting techniques and organizational performance .. A descriptive design was used to identity the relationship between capital budgeting techniques and performance in Water Services Boards in Kenya, whose number stood at 8 as at June 2008. A semistructured questionnaire was used to collect primary data from the respondents. Since all the Water Services Boards have websites and reliable internet connection, the researcher sent the questionnaires to the respondents outside Nairobi by electronic mail. The Boards whose Head offices are located in Nairobi received their questionnaires by hand delivery (See Appendix III). Statistical Package for Social Sciences (SPSS) was used as an aid in the analysis. For purposes of the current study, the data pertaining to the profile of respondents was analyzed by employing content analysis. In order to determine the relationship between capital budgeting techniques and performance, regression analysis was used. Findings of the study indicated that the capital budgeting techniques used by Water Services Boards in Kenya include Net Present Value, Internal Rate of Return, Profitability Index, Average Rate of Return and Payback Period. The findings further showed that the Factors that Influence the choice of capital budgeting techniques include: - Cost of debt to the Water Service Board, either from public or private sources; Internal Rate of Return; Average cost of capital for its stakeholders; Average rate of return on equity invested by the Water Services Boards; and Risk associated with the project. The findings also pointed at a positive relationship between usage of capital budgeting techniques and organizational performance. Improved access to funding to undertake projects and informed decision making were cited by the respondents as being the major benefits of adoption of capital budgeting techniques.