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International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2013): 4.438
Volume 4 Issue 1, January 2015
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Licensed Under Creative Commons Attribution CC BY
Capital Budgeting Procedures and Practices of
Unsung Entrepreneur in Delhi
Anuradha Yadav
Assistant Professor, M.Com, M.Phil, MBA Bhagini Nivedita College, University of Delhi, Delhi
Abstract: This study investigated the extent to which capital budgeting practices and procures are employed by unsung entrepreneur of
Delhi work in this area has been focusing on corporate firms, paying little attention to non- profit organizations. The study design
adopted is the survey design. The study focuses on primary data as well as secondary data. Primary data were obtained from employees
of individual firms using self-designed questionnaire, while secondary data were obtained from financial reports of the same firms. Data
were analysed using computer software. The findings in this study indicate that the initial stages of capital budgeting process are being
followed in firms, but minimal implementation follows. This is supported by: - proportion of participants who showed that they normally
divert funds, presence of stalled and idle projects in firms and an indication that modern appraisal techniques of capital budgeting are
not highly applied. A number of capital budgeting techniques find place in basic as well as advanced text books on Financial
Management and Corporate Finance. Each technique has its pros and cons as a decision making tool. The research paper investigates
the decision making practices of unsung entrepreneur with respect to Capital Budgeting the techniques employed. The paper also
examines the linkage between the techniques employed and various factors such as; size of investment outlay, nature of investment,
firms size, and growth rate and capital structure. Also probed is the extent of delegation of decision making authority in respect of
capital budgeting decisions. Further, the respondents’ views on relative popularity/significance of the techniques and reasons for the
same have also been studied. Furthermore, the differences in techniques and decision making practices of unsung entrepreneurs and
popular companies operating in India have also been looked. The information/data for the above stated purpose was collected through a
secondary data from some companies. The main findings extracted from the responses to the questionnaire are, that key decision
makers of unsung entrepreneurs are quite aware of and practically using sophisticated capital budgeting techniques. The study shows
that bigger size companies give greater preference to IRR, while unsung entrepreneurs rely more on NPV. Also unsung entrepreneurs
are keener in estimating the payback period (PP) as compared to larger companies. Consciously or unconsciously the unsung
entrepreneurs relying more on debt financing or with high growth rates give more preference to the NPV technique, while low leverage
and low growth colleges rely more on IRR. Unsung entrepreneur account for big percentage of Indian jobs and yet most of the studies
on capital budgeting techniques have been focused on large firms. A mistake in their capital budgeting process could lead to disastrous
consequences as they do not have the financial clout to recover from them. The purpose of the paper is to investigate where small
unsung entrepreneurs stand in regard to the use of capital budgeting techniques and risk analysis.
Keywords: Capital budgeting, unsung entrepreneurs, Practices, procedures, Capital budgeting practices and procedures, large scale
companies
1. Introduction
In Delhi unsung entrepreneurs, much concern has been
given to physical facilities. According to the report by
employees, the financial manager concern about an
enormous backlog of expenditure on maintenance of unsung
entrepreneur’s buildings and other physical facilities, many
of which have deteriorated badly. The importance of capital
budgeting for an unsung entrepreneur cannot be
overemphasized. Capital budgeting decisions have a long
term impact on the viability of a firm and its ability to
operate as a going concern. Compared to current asset
management decisions, there is almost no room for
flexibility or correcting a mistake if a wrong capital
budgeting decision has been made and implemented. Given
the importance of capital budgeting decisions, this research
paper highlights commonly used capital budgeting
techniques, computation of discount rate and methods for
estimating project risk; as employed by unsung
entrepreneurs and companies. In this regard, a survey
questionnaire was designed to collect data from unsung
entrepreneurs and companies.
One of the most important aspects of managing a company,
besides leading it towards the vision of its owners, is the
management of capital. The use of capital budgeting
techniques is hence an integral tool in capital management.
Capital budgeting can be defined as the “total process of
generating, evaluating, selecting and following up on capital
expenditures”. Hence, capital budgeting techniques would
be the set of tools with which financial managers use to
establish criteria for investing capital into available
opportunities. A mistake in its capital budgeting process thus
would cause a detrimental effect to the financial position of
the company in the future. The pressure on a financial
manager is understandably enormous. Therefore, depending
on the needs and direction of the company, the financial
manager is to apply capital budgeting techniques that would
maximize the value of the company.
Furthermore, Peterson [1] states that, to correctly implement
these techniques, analysis of the following is required:
• Its future cash flow;
• The degree of uncertainty associated with these future
cash flows;
• The value of these future cash flows considering their
uncertainty.
Even though small unsung entrepreneurs account for big
percentage of all employment in India, limited studies have
been done on small manufacturing companies. Hence, the
aim of this research is to ascertain where small unsung
entrepreneurs in India stand in regard to the use of capital
budgeting techniques and risk analysis.
Paper ID: SUB1574 37

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The design of the survey permitted us to thoroughly
understand the financial decision taken by unsung
entrepreneurs and companies making practices and their
relationship with various characteristics of the firms.
Specifically we mainly looked into the following:
1) Relationship between the size of the firm and the capital
budgeting techniques used
2) Extent of delegation of authority in the firm in respect of
capital budgeting decisions
3) Relative importance and significance of different capital
budgeting techniques
4) Linkages of capital budgeting techniques used with the
investment outlay.
5) Linkage of capital budgeting techniques employed with
growth rate of firms
6) Basis for risk assessment of a project and for change in
riskiness
7) Frequency of review of firm’s cost of capital
Section II describes the sample selected for this paper and
outlines the research methodology, Section III provides the
findings and their impact for unsung entrepreneurs and
companies in detail. Section IV presents conclusions and
some recommendation. Most companies and unsung
entrepreneurs follow academic theory and use discounted
cash flow (DCF) techniques to evaluate investment projects.
2. Research Objective
The main objective of the study was to investigate capital
budgeting procedures and practices of unsung entrepreneurs
in Delhi. The following are the specific objectives of the
study: -
1) to evaluate the status of the capital budgeting procures
and practices of unsung entrepreneurs in Delhi.
2) To evaluate the extent to which employees are capable of
following financial procedures
3) To find out the challenges that employees face when
implementing these processes and practices
4) To identify possible solutions to solve these challenges
3. Empirical Literature Review
Capital Budgeting Techniques Used by Unsung
Entrepreneurs and Large Organisation
The study showed that large organizations ranked Internal
Rate of Return (IRR) first, followed by Net Present Value
(NPV) and Pay Back Period (PBP) whereas unsung
entrepreneurs ranked PBP first, Accounting Rate of Return
(ARR) second and adjusted PBP and IRR third.
Surveys are few and far between when it comes to capital
budgeting techniques and small manufacturing companies.
In our survey, it was found that a large number of firms did
not formally analyse all proposals. The results also showed
that multiple evaluation techniques were preferred in the
analysis of proposals. Techniques that were problematic in
theory appealed to managers in practice. They concluded
that their results of the capital budgeting survey were
inconsistent with previous studies and they felt that it was
due to the sample that they chose. Payback continued to be
the dominant technique employed not due to lack of
sophistication but rather the financial pressures placed on
them by financial institutions. In spite of this, small business
has become more sophisticated and used DCF as the primary
method of analysis as compared to earlier studies. However,
this conclusion may be somewhat misleading as the discount
rate was not scientifically calculated. Several surveys of
capital budgeting practices reveal that the IRR is preferred
over the NPV as an investment decision making tool in large
scale companies. Practitioner’s preference for the IRR is
explained by the fact that IRR is treated as a display method
and is more cognitively efficient. Since the IRR is expressed
as an interest rate, it more closely resembles an analogy
display, in which the IRR is simply compared to the required
rate of return, whereas the NPV is expressed in rupees,
resembling a precise digital display.
4. Methodology
Survey design was selected for the study. Survey design was
appropriate for this study because it enabled the researcher
to collect information concerning the current situation of
unsung entrepreneurs as regards Capital Budgeting
Procedures and practices. Primary data as well as secondary
data were used. Primary data were obtained using a self-
designed questionnaire from the employees of unsung
entrepreneurs. The questionnaire focused on the capital
budgeting process, evaluating how to it has been followed.
The secondary data were got from financial reports of
unsung entrepreneurs. Out of twenty unsung entrepreneurs
firms, only fifteen of them responded. Data was analysed
using computer software and presented in this paper. We
designed a comprehensive survey questionnaire to collect
the responses of the business firm.
The questionnaire was designed to probe into the seven main
areas detailed in Section I. The responses were then
tabulated for the purpose of analysis and drawing
conclusions. A questionnaire was used to obtain information
regarding the capital budgeting practices of the targeted
unsung entrepreneurs. The survey, complete with reply paid
postage, consisted of 12 close ended questions and 6 open
ended questions. The survey sought to include small unsung
entrepreneurs as well as a small proportion of medium sized
companies. So the targeted companies were to have less than
100 workers under their employment
5. Results and Discussions
For the purpose of meeting research objectives the
researcher felt a need to probe into the existing capital
budgeting procedures and practices in the small scale firms.
5.1 Company Information
According to Table 1, majority of the manufacturing
companies surveyed are in the small company category. It
can be seen from Table 2 that 13.34% of the respondents
had a turnover of less than 12 lakhs. Next, 40% of the
respondents had a turnover range between 12-20 lakhs.
26.66% of those surveyed had a turnover between20-30
lakhs and only 6.66% of those surveyed had more than 40
lakhs in annual turnover. This data shows that even though

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they are considered small manufacturing companies, they do
have very large turnovers. Hence, they should at least be
employing some sort of capital budgeting techniques that
would properly manage their assets and capital to protect
their future financial position.
From Table 3, it can be seen that majority of the
respondents, 12%to be exact, were financial controllers of
their respective companies. 12% of the respondents were
managers, 13% were accountants with the rest being
company secretaries, supervisors, directors and general
managers.
Table 1: Number of employees
No. of Employees Frequency Percentage Cumulative Percentage
1 - 29 4 26.67 26.67
30 - 59 5 33.33 60
60 - 89 3 20 80
90 - 119 2 13.34 93.34
>120 1 6.66 100
Total 15 100 100
Table 2: Annual turnover of respondents
Annual Turnover (in lakhs)No. of Companies Percentage
>12 2 13.34
12-20 6 40
20-30 4 26.66
30-40 2 13.34
<40 1 6.66
Total 15 100
Table-3 Position held by respondents
Position held Percentage
Company secretary 8
Manager 12
Managing director 10
Accountant 13
Director 13
Financial controller 12
Supervisor 14
Assistants 18
Total 100
This data shows that even though these companies are
defined to be small due to the fact that they have less than
100 employees, the principal decision making functions do
not rest entirely on the shoulders of the owners or managers.
Financial controllers and accountants have been employed to
provide the owners with a better understanding of the
consequences of their decisions in pursuing any particular
project.
Respondents were asked to rank objectives of their company
in terms of importance. The results are shown in Table 4.
From the above table it is obvious that the most important
objective of the companies is to make as much profit as
possible. Furthermore, 66.1% of the companies felt that
increasing profitability is the most important with a mean
score of 4.55. Companies also felt that increasing sales
growth, providing a high quality of service and the provision
of their particular business were high on their agenda. One
company stated that in order to be a successful company,
they needed to excel in all of the above objectives listed out.
However, majority of the respondents felt that increasing
employment did not have such a high priority on their list of
objectives. This would probably be due to the fact that
increasing employment would not necessarily aid in their
aim on increasing profitability as it is widely known that
labour costs are the highest contributing factor to the cost of
production. As computers represent a lower cost in the long
run, they are increasingly being used by manufacturers who
only hire skilled labour to maintain these computers
systems. Hence, the manufacturers do not view increasing
employment as an important objective.
5.2 Financial Criteria
Respondents were asked about their use of capital budgeting
techniques and the way with which they go about using it.
Table 4: Objectives of company
Objectives Mean Score*
Increasing sales growth 4.27
Increasing profitability 4.55
Increasing employment 2.05
Provision of service 4.08
Quality of service 4.52
Table 5: Main areas where new investments were made in
(respondents could choose more than 1 option)
Main Areas for New Investment Percentage
Replacement and maintenance of machines 38
Extension of product lines 14
Expansion into new areas or markets 29
Safety of environmental concerns 12
Research and development 7
From Table 5 above it is observed that 38% of the proposed
investments go into the replacement and maintenance of
machinery. Expansion into new areas or market is next on
the agenda with 29% of respondents. Extension of products
was next with 14% with the rest being safety of
environmental concern and R & D.
Respondents were asked which techniques used when
deciding which projects to pursue. The results are shown in
Table 6.
It can be seen from Table 6 that Payback period is the most
heavily used method of evaluating projects with 48.4% of
the respondents stating that they used the techniques most
frequently. Only 4.8% of the respondents never used this
technique. This would most probably have to do with it
being one of the simplest techniques around that does not
require expert knowledge in the field of finance. Having said
that, unsung entrepreneurs may use this technique because
they have obligations to their banks that do not always see
the innovativeness of their ideas or look at the NPV or IRR
of the investment but rather how soon they could repay the
loans that they take out. They would use this technique to
provide a gauge as to how fast they could get their money
back from the investment. The arithmetic mean is 3.45 years
which equates to a minimum payback period yield of 29%
which is unusually high. This criterion would result in many
investments being rejected as the medium return on

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investment is not that high. From Table 6 it can be observed
that the Discounted Payback Period is not used frequently.
Only 12.9% of those surveyed used Profitability Index (PI)
frequently, 33.9% never used this technique in the capital
budgeting process. With a mean score of 2.39, it is not
entirely favourable with financial managers but is still used
once in a while. This technique could be used by them as a
secondary tool to gauge a project. As PI is not entirely
accurate when comparing between mutually exclusive
projects, as the project may show the same increment in
values but different net present values, this may explain the
lack of usage. The mean score of 3.35 for the technique
internal rate of return suggests that it is moderately used. It
is also the next most popular technique after the Payback
Period. This shows that the financial managers are using this
technique along with NPV to compliment that of Payback
Period. Even though it is not as commonly used as the
Payback Period, it shows that small companies are
beginning to adopt the usage of sophisticated capital
budgeting techniques in their evaluation of investments.
From Table 6, it shows that a whopping 43.6% of those
surveyed have never used the technique Accounting Rate of
Return while only 4.8% use it frequently. This shows that
the technique is not popular among managers. This is
because of the complexity of the techniques plus the fact that
there are many variants and also that the techniques is
flawed.
Table 6: Techniques used in project evaluation
Techniques Used in
Evaluating Projects
Never 1
(%)
2 (%) 3 (%) 4 (%) Always
5 (%)
Mean
Score
Payback period 4.8 8.1 8.1 30.6 48.4 4.1
Discounted payback
period
56.5 12.9 16.1 9.7 4.8 1.93
Net present value 14.5 11.3 27.6 20.9 25.7 3.32
Profitability index 33.9 29.1 14.5 9.6 12.9 2.39
Internal rate of return 14.5 12.9 22.5 22.5 27.6 3.35
Accounting rate of
return
43.6 24.2 16.1 11.3 4.8 2.08
6. Summary
The researcher analysed the information gathered from the
participants with the view of fulfilling the research
objectives and answering research questions. The study
revealed that in most small scale business, capital budgeting
process is not a “one man show”. This is supported by the
percentage of respondents who outlined that the originators
of investment proposals. Among the appraisal techniques,
the study has indicated that intuitive management, which is
highly nonmathematical, was highly applied than other
techniques. Application of pay-back technique was second
in preference. Little attention was being given to the modern
appraisal techniques; in particular discounted cash flow. In
search for schedule for fixed assets, the researcher was made
aware that unsung entrepreneurs apply cash- basis of
accounting, and hence not obliged to prepare annual balance
sheets.
7. Conclusions and Recommendations
According to the findings, the following conclusion
emerging from objectives of this study was made:-
The initial stages of capital budgeting process are being
followed in small scale firms, but minimal implementation
follows. This is supported by:- proportion of participants
who showed that modern appraisal techniques of capital
budgeting are not highly applied, which is seen from the
proportion of participants using each of the techniques. The
results indicate that even though the Payback period is still
ever present in the evaluation of capital investments for
small companies, it is encouraging to find that more
sophisticated techniques like the NPV and IRR are being
utilized to aid them in the capital budgeting process. It is
recommended that small companies continue to focus on
utilizing such sophisticated techniques that maximises the
wealth of owners instead of succumbing to the financial
pressure put on them by financial institutions.
Project evaluation is actually an integral part of the complete
manufacturing strategy. Every investment or project should
be followed up to determine that effectiveness of the
decisions made in earlier stages of the capital budgeting
process. It is further confirmed that project evaluation is not
critical to those surveyed when a large number of them
indicated that they did not perform post audits on capital
investment. So it is recommended that more attention should
be paid onto project evaluation as not every capital
investment is properly analysed and small companies are
more susceptible to these possible mistakes made as they do
not have the financial muscle to recover. We suggested that
government has to organise regular training programs on
Capital Budgeting for new professionals entering the
industry. This would augment the theoretical knowledge
which the fresh graduates bring with them from Business
Schools. Ultimately this will go a long way towards helping
in optimizing the use of our resources and minimizing the
chances of projects going sick due to incorrect or faulty
capital budgeting decisions.
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