AMBO UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNING AND FINANCE

FACTORS AFFECTING CAPITAL BUDGETING DECISIONS;
A CASE OF AMBO MINERAL WATER SC, ETHIOPIA

A RESEARCH SUBMITTED TO THE SCHOOL OF GRADUATE STUDIES OF AMBO

UNIVERSITY SCHOOL OF BUSINES AND ECONOMICS IN PARTIAL FULFILMENT
OF THE COMPLETION OF THE COURSE INTERODUCTION TO ECONOMETRICS
FOR FINANCE

SUBMITTED BY;

YOSEPH DEGEFU

SUBMITTED TO;

BEDASSA WALTEJI (Ph.D)

FEB, 2021

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 Table of Contents
Chapter One: Introduction................................................................................................4
1. INTRODUCTION.....................................................................................................4
1.1 Statement of the Problem...................................................................................5
1.2 Objectives of the study.......................................................................................5
1.3 Significance of the study.....................................................................................6
1.4 Scope of the study.............................................................................................6

Chapter Two: Literature Review.........................................................................................7

2.1 Theoretical Reviews............................................................................................7
2.2 Over views of Capital budgeting decision..............................................................7
2.3 Significance of Capital Budgeting.........................................................................8
2.4 Capital budgeting Decision process......................................................................8
2.5 Factors Affecting Capital Budgeting......................................................................9
2.6 Capital Budgeting Techniques..............................................................................9
2.6.1 Payback Period Method.....................................................................................11
2.6.2 Accounting Rate of Return:................................................................................12
2.6.4 Profitability Index (PI):.....................................................................................12
2.6.5 Internal Rate of Return (IRR):...........................................................................12
2.7 Empirical Review: Capital Budgeting Decision......................................................13
2.8 Literature Gap.................................................................................................13

Chapter Three: Research Methodology..............................................................................15

3.1 Research Design..............................................................................................15
3.2 Research Approach...........................................................................................16
3.3 Source of Data.................................................................................................16
3.4 Data Analysis Method.......................................................................................18
3.5 Ethical Considerations.......................................................................................19
3.6Work Plan/ Time Schedule........................................................................................20
3.7 Budget............................................................................................................20

Chapter Four: Result and Discussion................................................................................21

4.1 Reliability Test Result.......................................................................................21
4.2 General Background of Respondent....................................................................22
4.3 Capital Budgeting Techniques applied.................................................................24

Chapter Five: Summary of Findings, Conclusion and Recommendation.................................37

5.1 Summary of Findings........................................................................................37
5.2 Conclusion......................................................................................................38
5.3 Recommendation.............................................................................................39
5.4 Future Research...............................................................................................39

References....................................................................................................................40

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Abstract

The general objective of this study is to assess factors affecting Capital Budgeting Decisions in
Ambo Mineral Water S.C. Capital budgeting decisions using qualitative and research method. To
make this happen data collection tools like interviews, focus group discussions, observational
methods and secondary data will be used for analysis. Then, the structural equation modeling
approach and case study models will be done after undergoing each factors analysis, which will
results in a better-developed model after various rotations with different variables so that to
arrive at the best-fit of structured model. This paper will be based on primary data that sis going
to be collected with non-probability judgement sampling. Eight managers will be selected to
participate in capital budgeting activities by categorizing the variables into four factors - Size,
Risk, Social Cost Benefit Analysis (SCBA) and Trait. The researcher will conduct regression
analysis to check first three factors (Size, Risk and SCBA)’s significance and influence of them
on capital budgeting decision in Ambo Mineral Water SC.

Keywords

Capital Budgeting, Trait, Size, Risk, Social Cost Benefit Analysis, DCF Techniques.

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CHAPTER ONE
1. INTRODUCTION
Capital budgeting is a company’s formal process used for evaluating potential
expenditures or investments that are significant in amount. It involves the decision to
invest the current funds for addition, disposition, modification or replacement of fixed
assets. The large expenditures include the purchase of fixed assets like land and building,
new equipment, rebuilding or replacing existing equipment, research and development,
etc. The large amounts spent for these types of projects are known as capital expenditure.
Capital Budgeting is a tool for maximizing a company’s future profits since most
companies are able to manage only a limited number of large projects at any one time.
(Mid-market pulse, zazen Edu Pristine.com)

Lazaridis (2004) states that the crux of capital budgeting decision is profit maximization.
There are two ways to it; either increase the revenues or reduce the costs. If an
investment proposal is accepted, the decision for capital budgeting is that, a firm invests
in it and if rejected the firm does not invest. Generally, proposals that yield a rate of
return greater than a certain required rate of return or cost of capital are accepted and the
others could rejected. All independent projects are accepted. Independent projects are
projects that do not compete with one another in such a way that acceptance gives a fair
possibility of acceptance of another. Mutually exclusive project decision compete with
other projects in such a way that the acceptance of one will exclude the acceptance of the
other projects. Only one may be chosen. Mutually exclusive investment decisions gain
importance when more than one proposal is acceptable under accept or reject decision.

The acceptance of the best alternative eliminates the other alternatives. Capital rationing
decision required in a situation where the firm has unlimited funds, capital budgeting
becomes a very simple process. In that, independent investment proposals yielding a
return greater than some predetermined level are accepted. However, actual business has
a different picture. They have fixed capital budget with large number of investment
proposals competing for it. Capital rationing refers to the situation where the firm has
more acceptable investments projects requiring a greater amount of finance, than that is
available with the firm. Ranking of the investment project employed

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because of some predetermined criterion as the rate of return. The project with highest return
ranked first and the acceptable projects then ranked thereafter.

This research will be organized with First section starting with introduction, the second section
will outline the literature review, third section will describe the sample, methodology, analysis &
discussion and finally, section four will draw the conclusions and recommendation of the study.

1.1 Statement of the Problem

The evidence from Swedish companies studied by Daunfeldt O. and F. Hart wig indicates
that larger companies tend to use capital budgeting methods more often when deciding on
investments. The choice of capital budgeting methods influenced by Size, Risk, Social Cost
Benefit Analysis (SCBA) and Trait and other individual characteristics of the CEOs. As
outlined in introduction section, most studies explore only use or non-use, or the frequency of
use, of capital budgeting methods, and not the factors that determine factors affecting capital
budgeting decision and calculation or computations.
The motivation for this study emanates from the lack of methodological research on capital
budgeting decision and factors affecting/influencing it. Hence, this study serves two
purposes, the first is to survey capital budgeting methods applied by Ambo Mineral Water
S.C and the second is to validate the impact of various factors, which influence the capital
budgeting decisions taken by Ambo Mineral Water S.C.
1.2 Objectives of the study
1.2.1 General objective
The main objective of this research is to assess Factors Affecting Capital Budgeting
Decision (CBD) in Ambo Mineral Water S.C (AMW SC) with their degree of influence
by adopting a case study and to recommend if any improvement there.
1.2.2 Specific Objectives
The specific objectives of this research will be:
 To assess the capital budgeting decision and factors affecting it in AMW S.C
 To investigate capital budgeting decision trend analysis AMW S.C
 To assess the challenges of current capital budgeting decision and process of AMW S.C’s

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  To check which capital budgeting method adopted by AMW SC for decision-making.
1.2.3 Research questions

The following research question will addressed to fulfill the requirement of specific objectives of
the thesis depicted above.

1. What are factors affecting capital budgeting decision at Ambo Mineral water SC
2. What CBD trends are there at AMW SC to make things smooth with lower cost and higher
return in the last two years?
3. What are the challenges at AMW SC that hinder their CBD process during the last two
years?
4. What are method of capital budgeting techniques is/are maintained at AMW SC for long-
term investment decision?
1.3 Significance of the study
The importance of investment decisions on financial performance of firms cannot be over
emphasized since many of the factors that contribute to business failure can be addressed
using strategies and financial decisions that drive growth and the achievement of
organizational objectives (Kemuma, 2011).
The study will believed to be significant for its proposed contribution to fill the gap in
analysis of the capital budgeting decision and will help the management of AMW SC to
evaluate the current capital budgeting decision system and take actions on any improvement
required in the company’s capital budgeting decision process. Hence, this research will serve
as reference for the corporations’ management team to evaluate the capital budgeting in their
business environment, and as a base for improvement to the practices. It will also use to other
researchers in the subject area for further study.
1.4 Scope of the study
The current study confined to the assessment of factors affecting capital budgeting decision
in AMW SC. The company selected for the study, as it assumed exemplary in that it is a very
old company with 88 years of practice in capital budgeting decision. A case study design was
used to study for the capital budgeting techniques to take the advantage of rich data scope.
This research will focus on capital investment made on fixed assets (mainly crates and
bottles) and some specially designed engineering and accounting software.

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 Chapter Two
Review of Literature
2. Review of Related literature

This part of the researcher’s proposal presented in detail theoretical, conceptual framework
and/or empirical related to the subject matter under the study. Theories concerning capital
budgeting decisions will reviewed and addressed in detail topics. Empirical literatures will be
reviewed and presented to show the studies done on the theme and literature gap.
2.1 Theoretical Reviews

The effectiveness of capital investment theoretically associated with the disciplines of capital
budgeting practices. Therefore, in order to capture the theoretical framework, the researcher will
present capital budgeting overviews and detail theories found from different theoretical sources.

2.2 Over views of Capital budgeting decision

According to Chandra (2004) the first and perhaps the most important decision that any firm
has to make is to define the business or businesses that it wants to be. According to Bhalla
(2004), the field of capital budgeting is both comprehensive and challenging. It clearly plays
a rite role in assisting most business firms to achieve their various goals. Herman, Edwards &
Ivancevich (2011), defined capital budgeting as the planning, evaluation, and selection of
capital expenditure proposals. Herman, Edwards & Ivanccevich (2011), states that Poor
capital budgeting decisions can be costly because of the large sums of money and relatively
long period involved.
For Quirin (1967) capital budgeting is a process for analyzing and selecting long-term
investment projects. Concerning the need for capital budgeting analysis need Gilman (2008)
states that long term investments represent sizable out lays of funds that commit a firm to
some course of action. Consequently, the firm needs procedures to analyze and properly
select its long-term investments.
Hagos (2007) described investing is incurring costs in order to gain benefit during the
estimated life of the plant assets or current assets in the future. Therefore, investment

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 activities should evaluate with its factors affecting its decision very carefully. According to
Kolb (1968), the theory of capital budgeting calls for:
1. Estimating in terms of a rate of return the benefits expected to result from carrying out a
capital investment project,
2. Estimating the overall cost of capital to the firm (also in terms of a rate)
3. Basing approval of the project up on whether or not the benefits exceed the cost of capital.
2.3 Significance of Capital Budgeting
According to Ballad (2004), there are several practical reasons for placing greater emphasis
on capital expenditure decisions. The investment involves long period and substantial
expenditures. In addition, the irreversibility nature of long-term investments without
paramount loss and the effect of over and under capacity of the business bring additional cost
to the business. Khan & Jain (2007) states that the rationale underlying the capital budgeting
decision is efficiency. Thus, a firm must replace worn and obsolete plants and machinery,
acquire fixed assets for current and new products and make strategic investment decisions.
2.4 Capital budgeting Decision process.
According to Noreen, Brewer & Garrison (2011) any decision that involves an outlay now in
order to obtain a future return is a capital budgeting decision. Typical capital budgeting
decisions include cost reduction decision, expansion decision, equipment selection decision,
and lease or buy decisions and equipment replacement decisions. Capital budgeting, as we
know, is a decision making process. It involves the following six steps:

Figure 1 Noreen capital budgeting decision- process

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a. Identifying Potential Investment Opportunities: The Company has various options for
capital employment on a long-term basis. In the initial stage, the management needs to
analyze the strengths and weaknesses of every project for foreseeing the potential of each
option.
b. Evaluating and Assembling Investment Proposals: In the next step, the management
assembles and compiles all the investment proposals on the grounds of cost, risk
involvement, future profits, return on investment, etc.
c. Decision Making: Now, the company needs to decide as to which investment option it may
select to suit its pocket and yield a high profit for the company in the end.
d. Capital Budgeting and Apportionment: The next step is to classify the investment as per
its duration. The long-term investment is generally considered under capital budgeting. This
step helps in monitoring the performance of an individual investment.
e. Implementation: After the apportioning of the long-term investment, the company comes
into action for the execution of its decision. To avoid complications and excess time-
consumption, the management should lay out a detailed plan of the project in advance.
f. Performance Review: The last but the most crucial step is the follow-up and analysis of the
project’s performance. While the company’s operations are steady, the management needs to
measure and correlate the actual performance with that of the estimated one to figure out the
deviation and take corrective actions for the same.
2.5 Factors Affecting Capital Budgeting
The capital budgeting decisions influenced by various elements present in the internal and
external business environment. Following are some of the significant factors affecting investment
decisions:

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 Fig, 1 (https://theinvestorsbook.com/wp-content/uploads/2019/03/FACBD.jpg)

Capital Structure: The Company’s capital structure, i.e., the composition of shareholder’s funds
and borrowed funds, determines its capital budgeting decisions.

Working Capital: The availability of capital required by the company to carry out day-to-day
business operations influences its long-term decisions.

Capital Return: The management estimates the expected return from the prospective capital
investment while planning the company’s capital budget.

Availability of Funds: The company’s potential for capital budgeting is dependent on

its dividend policy, availability of funds and the ability to acquire funds from the other sources.

Earnings: If the company has a stable earning, it may plan for massive investment projects on
leveraged funds, but the same is not suitable in case of irregular earnings.

Lending Policies of Financial Institutions: The terms on which financial institutions provide
loans such as interest rates, collateral, duration, etc. contributes to capital budgeting decisions.

Management Decisions: The decision of the management to take a risk and invest funds in
high-value assets or holding some other plan, also determines the capital budgeting of the
company.

Project Needs: The Company needs to consider all the essentials of a new project. In addition,
the means to fulfil the requirements along with the estimate of the related expenses should be
clear.

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Accounting Methods: The accounting rules, principles and methods of the company is another
factor considered while capital budgeting to frame the reporting of such expenses and revenue to
be generated in the future.

Government Policy: The restrictions imposed, and the exemptions allowed by the government
to the companies while investing in capital nature, affects the company’s capital budgeting
decisions.

Taxation Policy: The taxation procedure and policy of the country also influences the long-term
investment decision of the firm since additional capital will be required for such expenses.

Project is Economic Value: The total cost estimated for the long-term investment and the
capacity of the company determines the capital budgeting decisions.

2.6 Capital Budgeting Techniques

Capital budgeting is a complicated and tedious process. It involves a lot of financial
expertise and calculations. According to Keown, Martin, Petty & Scott (2003) and
Herman, Edwards & Ivanccevich (2011), the following methods techniques identified
for analysis of CBD in today’s business environment.

Figure.2 Capital Budgeting Techniques (https://www.cbt.com/search?tbs)

2.6.1 Payback Period Method

The payback period method is the simplest of all. It defines the period in which the
company can recover its investment value.
The formula for calculating the payback period of a project is:

The shorter is the payback period of the project, the more suitable it is for the company.

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2.6.2 Accounting Rate of Return:
The accounting rate of return depicts the future profitability of a project with the help of
accounting information mentioned in financial statements.
The formula for calculating the accounting rate of return is:

The higher is the ARR of the investment proposal, the more preferable it is for the company.
2.6.3 Net Present Value (NPV) Method
Net present value is the discounted cash flow method. It functions on the principle that the
cash inflow from the project will be acquired in a future period when the value of money
will change. Hence, the future cash flow needs to be discounted at present value to compare
the estimate performance with the actual one.

The Net Present Value (NPV) formula is:

i.e,

Where, A1, A2, A3 are the cash inflows in consecutive years; k is the cost of capital of the
project; we assume that all the cash outflows are done in the first year (t) and therefore,
t=one.

2.6.4 Profitability Index (PI):

Profitability index is the ratio, which relates the present value of earnings with the
investment value. The formula of the Profitability Index (PI) is:

OR
To denote the Profitability Index in percentage, Profitability Ratio of a new project is
calculated. Its formula is:

2.6.5 Internal Rate of Return (IRR):

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 The internal rate of return determines the rate at which the investment amount is
recovered by the cash inflows. The net present value of the project is zero in this
method. In addition, the discounted cash inflow and outflow are the same. Initially, the
Present Value of Cash Outflow (Co) calculated as follows:

Where Co is the present value of cash outflow; C1, C2, C3 are the cash inflows in the
consecutive years; n is the number of years; r is the expected rate of return.
This is the  cutoff rate of the project.
The Internal Rate of Return (IRR) formula is:

Where NPV (LR) is the net present value at a lower rate, NPV (HR) is the net present value
at a higher rate. Analysis: If the IRR≥Co, the project is accepted; but if IRR<Co, the project
is rejected.
2.7 Empirical Review: Capital Budgeting Decision
As indicated in the overview of the chapter of the study section the main point to address in this
study is to assess how capital budgeting decision was practiced in Ambo Mineral water SC
Capital budgeting process involves many activities that ensure the existence of good business
practice in organization. Therefore, the study tried to review and presented empirical research
conducted in capital budgeting practices worldwide and presented as follows:
Lazaridis (2004) argue that companies mostly use capital budgeting techniques for evaluating
projects intended to be launched that leads for companies’ operation to be profitable. This
ensures the management to commit resources on profitable projects that meet the minimum
threshold. In addition, Hornstein & Zhao (2011) indicates that a significant relationship exist
between value enhancing capital budgeting decisions and stronger internal linkage. Moreover,
Batra & Verma (2017) found that corporate practitioners largely follow the capital budgeting
practices using discounted cash flow techniques of net present value and internal rate of return.
Non-financial criteria are also given due consideration in capital budgeting decision.
2.8 Literature Gap
Lazardis (2004) clearly showed the importance of capital budgeting techniques for profitable
operation thereby ensuring the management commits resources on profitable projects only. In

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 capital budgeting practices, Slagmulder et al. (1995) found that pre-established criterion
governs capital budgeting practices and strategic considerations receive attention in decision-
making processes. Verbeeten (2005) found that firms use advanced capital budgeting
practices in case of financial uncertainties.
As we can see from the above summary, there are serious issues considered in capital budgeting
practices to bring efficient utilization of resources. There is also a contradiction in findings of
different researchers. In addition, these research were conducted in developed economies and no
previous study is there concerning the subject matter in Ethiopian context. Therefore, this gap
derives the attention of the researcher to engage in assessing the capital budgeting decision of
Ambo Mineral Water SC.
This research will be different from other research in that, such research were not conducted in
developing countries especially in Ethiopia. Therefore, the researcher is the first person to
conduct such like study in developing country, which in turn make this study different from other
prior thesis done in developed economy which the turnover id huge in respect of countries like
ours.

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 Chapter Three
3. Research Methodology
The research tends to check those factors affecting capital budgeting decision in Ambo Mineral
Water SC and will preceded by an extensive literature review. The review embraced literature on
investment appraisal methods and the organization of the investment process. In particular, it
included research into the diffusion of capital budgeting methods and factors influencing
budgeting decision (e.g. Klammer et al., 1991; Graham and Harvey, 2001; Sandahl and Sjögren,
2003; Brounen et al., 2004; Verbeeten, 2006; Bennouna et al., 2010; Daunfeldt and Hartwig,
2011).

As previous studies show companies in North America, Asia and Pacific countries most
commonly use DCF methods. DCF methods are less common among companies from Western
Europe and similarly used in the countries of Central and Eastern Europe and Africa.

3.1 Research Design

This research is going to assess the capital budgeting practice of Ambo Mineral water SC with
the case study research design using mixed research approach. The use of case study research
design will help to perform in depth analysis of the responses collected from multiple sources to
get answers to the research questions. An emphasis on detail provides valuable insight for
problem solving, evaluation, and strategy. This detail secured from multiple sources of
information. It allows evidence in order to verify and avoid missing of the data.

In order to get answer to the research questions the researcher used descriptive research design.
Descriptive research includes surveys and fact-finding enquires of different kinds in addition to
case study. The main purpose of descriptive research is description of the state of affairs as it
exists at present and it helps to portray accurately the characteristics of a particular individual,
situation or group. Descriptive research design is appropriate for this study since it is useful
when the problem has been defined specially and where the researcher has certain issue to be
described by respondents about the problem.

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 3.2 Research Approach
Creswell (2003 & 2014) noted that in an investigative study there are three familiar types of
research approaches to business and social research namely, quantitative, qualitative and
mixed approach. However, each approach has its own strengths and limitations, Creswell
(2003 & 2014), advocates that certain types of social research problems call for specific
approach. Hence, in selecting an approach one should take in to account the nature of the
research problem, the personal experience of the researcher, and the audience for whom the
report will checked. The researcher used mixed research approach, which tends to give better
insight to the study. This approach is appropriate for the research work based on data, which
will collected through, closed ended and likert scaled questions. The research looked for
pattern of meaning because of the data that that to be collected through structured questions.
In addition, the research work used interview and document review to gather some important
information concerning the study, which helps to triangulate and clarify points that may need
further investigation.
3.3 Source of Data
3.3.1 Data Collection Method
Data for this study will collected from primary and secondary sources. The Primary sources are
questionnaire and interviews feedback. The secondary data source is document review. Data
from interview and document review help to triangulate findings from the questionnaire data
source.
3.3.1.1 Question ire Instruments
Data that will collected through questionnaire will be from senior experts who extensively
involve in the preparation of capital budgeting decision as well as from senior managers who
supervises the operation. The questionnaire will developed and refined based on field interviews
with some senior managers in the company. The questionnaire will compose 52 closed ended
questions, which will be grouped in to 9-sub sections. The first sub section designed to provide
general information about respondents and the other eight sub sections designed to provide basic
information that can help the researcher to assess how capital budgeting decision conducted at

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the company. The questionnaire feedback will also be collected using 5-point likert scale and the
data will be analyzed and interpreted using frequency, mean score and standard deviation.
Because of the sensitivity nature of some of the questions that will asked, the level of detail
sought, and the anonymity of the respondents may be occurred in cover letter explaining the
purpose of the study.

In the questioners, five-point Likert scale ranging from strongly disagree (1) to - strongly agree
(5) will be used. The main advantage of likert scale questions is that they use a scale,
respondents will not be forced to express an extreme opinion allowing them to be neutral should
they so choose. The researcher will prefer to use a likert- type scale because it is very easy to
analyze statistically (Jackson, 2009). The questionnaire will also include open-ended questions to
collect other additional relevant data that will be there for the respondents that cannot be
included in the closed ended questionnaires.

3.3.1.2 Interview Instruments

Interview will be conducted to get clarification for some questionnaire feedbacks, which require
triangulation since interviews are an excellent way to gather detailed information about the
study. It will provide an opportunity for face-to-face interaction between two persons; hence,
they reduce conflicts. Unlike questionnaire, the interviewer has the opportunity to probe or ask
follow up questions. The corporation’s plan and program executive officer will be interviewed to
get answer for items that need clarification. The interview feedback is included in chapter four of
the study report.

3.3.1.3 Document Sources

Document sources like Capital budget activities documents, policy and procedure guidelines of
capital budget process and strategic plan of the AMW SC for the period covered 2018 to
2019G.C. will used for this analysis purposes. The review will help to gather background
information about the corporation’s capital budgeting work process guideline and how actual
work will conducted. The results of the review work will help the researcher to triangulate results
from questionnaire analysis and it will include in chapter four of the study report.
3.3.2 Sample Techniques and Sample Size
The research work will be designed to find out answers to the research questions mentioned in
the research question section. Data related to these activities are associated with experts working
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on the activities and senior managers who supervise the operation. Therefore, to get relevant
information to the study non-probability sampling specifically purposive/judgement sampling
technique will used and out of 27 management staffs, 8(eight) will be selected. As the research
design is case study, this method of sampling allows data collection from those experts and
senior managers who has the professional experience to give the required information about
capital budgeting practices. The company possesses multidisciplinary professionals with
extensive and proven experience in the engineering consultancy services as well as in other
support services. According to strategic planning and management document for the period
2018-2019GC and the company possesses 178 work force with different qualification level as
presented below in the pie chart.

Figure 3. Work force of al staff of Ambo Mineral Water SC

According to the information obtained from Human Resource management of the company
(2019G.C.), the total number of senior managers and experts who directly engaged in the capital
budgeting activities are 27. From the total population of 27 the researcher chooses 8(eight)
professionals who have extensive work experience on capital budgeting practices using non
sampling techniques called judgement sampling.. The work experience level provides advantage
in providing relevant and reliable information to the study. As the study focuses in assessing the
capital budget practices of the AMW SC, using purposive sampling provided chance of getting
better information from employees who judged to do so. The sampled employees were selected
based on their regular engagement on preparation of annual plan (Budget proposal), evaluation
of annual plan (Budget proposal), and approval of annual plan (Budget proposal).

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 3.4 Data Analysis Method
The questionnaire results will be analyzed quantitatively by using descriptive statistics, namely
mean, frequency and standard deviation. Descriptive results summarize a given data set that can
be either a representation of the entire population or a sample of it. They provide descriptive
statistic results summarized to measure frequency, spread and central tendency. SPSS software
will used to run the data. The results will be interpreted to draw appropriate conclusion
concerning the problem statement. In addition, data that will collected through interview and
document review will used as a source of additional information and to triangulate results of
questionnaire.

3.5 Ethical Considerations

This study will be conducted with self-sponsorship by the researcher himself. In addition, the
management may show interest to get clear information about its capital budgeting practices. To
achieve the management’s expectation, it is necessary to exercise some ethical issues. This will
protect the interests of the researcher as well as the company. The people who may involve in the
study as data provider also will ethically be protected for the information they shared during data
collection.

The researcher will exercise due diligence in designing the research work which can provide a
platform on which to conduct the study. In addition, secret of the company must be protected and
the concerned authority acknowledges all data used in the study. The privacy of the people that
will be engaged in providing data will protected securely. Data that will collected through
interview will be included in the report with consent of the interviewee.

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 3.6 Work Plan/ Time Schedule
Factors Affecting Capital
Research Tittle Budgeting Decision, the Case of
Ambo University
Ambo Mineral Water SC, College of Graduate Studies
Masters Thesis Time Table Proposal
Started
Department of Accounting and Finance/Time Schedule
Leader: Dr. Prassad Display Week: Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21

TASKs W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4

1. Perparing Proposal and submitting it to department

2. Editing proposal as per Comments from departmemt

3. Start Data Collection and compiling data collcted

4. Send first draft analysis of my paper and accept comments from main research draft

5. Edit First comment on the above analysis#4

6.Submit Final research paper to Department

7. present the paper/dfending as per schedule

3.7 Budget
Activities Amount-ETB
Purchase of laptop repair 5,000.00
Purchase of Internet dongle 2,000.00
Monthly subscription/iDongle 6,000.00
Purchase of paper 750.00
Printing 500.00
Telephone Charge 1,000.00
Total Budget 15,250.00

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Chapter Four

4. Result and Discussion

This chapter presents results and discussion of the study. The first section, section 4.1 presents
reliability test result. General background of respondents is presented in section 4.2.
Questionnaire results concerning the capital budgeting practices is presented in section 4.3. In this
section tables from 4.3.1 to 4.3.7 is presented with their discussions. It is clearly stipulated in the
research methodology section that questionnaire is one method of data collection instrument.
Accordingly, questionnaire which is organized in 10 Subtopics is distributed to sample of 50
respondents. Out of the total 50 questionnaires distributed to the sample, 46 were filled and
returned. Thus, the response rate for this case study is 92%. The 46 questionnaire feedback
analysis results are presented in 11 tables followed by discussions.
4.1 Reliability Test Result

Table 4.1. Cronbach Alpha Tests (Reliability statistics)

Questionnaire sub titles Alpha

Capital budget task organization 0.83
Capital budget task planning 0.85
Capital budgeting evaluation task 0.72
Capital investment selection task 0.87
Capital budget implementation task 0.78
Post implementation evaluation task 0.90
Challenges in capital budgeting practice 0.90
Average 0.84

Source: Case study results, 2019, Ambo Mineral water Sc

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The Cronbach’s alpha result of .85 clearly shows the existence of consistency within the feedback
collected from the respondents. The researcher also confirmed the existence of the same result to the
whole 46 questionnaires feedback. Note that a reliability coefficient of .70 or higher is considered
‘’acceptable’’ in most social science research. Therefore, the researcher concluded that the average 0.84
Cronbach’s alpha value is far beyond the minimum requirement and confirmed the existence of
consistency which shows reliability of data.

4.2 General Background of Respondent

Table 4.2. 1: Respondents by Gender & educational background

Educational background
Sex First Degree Second Degree Total
Count Percent Count percent count percent
Female 8 17.39 6 13.04 14 30.43
Male 14 30.44 18 39.13 32 69.57
Raw total 22 47.83 24 52.17 46 100

Source: Case study results, 2018.

The above table shows that out of the 46 respondents 30.43% are female and 69.57% are
male. There educational back-ground information summary shows that 22 of them have
first degree and 24 of them have second degree qualification level. This summary shows
that the researcher used data from well-educated source. The source of data exhibits
reliability from the point of respondents’ educational status which guarantees the
respondents understanding of the language used and the topics addressed in the
questionnaire. As sample was drawn from employees who are actively participated in
capital budgeting practices, the existence of educated employees guarantees the
acquirements of relevant information about the capital budgeting practices.
Table 4.2.2: Respondents by years of service and work position
Work Position
Years of
Managerial Supervisory Expert Total
Service
Count Percent count Percent Count Percent Count percent
Less than 5 years 1 2.17 1 2.17 4 8.70 6 13.04
5-10 years 3 6.52 1 2.17 4 8.70 8 17.39

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 Greater than 10
17 36.96 8 17.39 7 15.22 32 69.57
years
Raw total 21 45.65 10 21.73 15 32.62 46 100

Source: Case study results, 2018.

The above table indicates the existence of well experienced employees. 32% of the respondents
have greater than 10 years of experience out of whom 36.95% have managerial position.

This fact confirms the reliability of data source for it is general truth that well experienced
respondent can provide better information. In addition, respondent with a managerial position
can provide better information concerning the study for simple reason of sense of responsibility.
Table 4.2. 3: Professional background of respondents

Profession Count Percent Remark

Engineering 9 19.60
Finance 23 50.00
Administration 14 30.40
Raw total 46 100

Source: Case study results, 2018.

The table above clearly shows that most of respondents have Administrative and finance
background. 50% of respondents are from finance and 30.40% are from administration stream.

The corporation’s capital budgeting practice some time involves investments which need
engineering professionals. For this reason, the researcher included some in the sample of the
study. 9% of respondents are from this stream.

The researcher initially conducted interviews with sample chosen to get information about the
stream of their professional background and found that mechanical engineers economists and
professionals from management streams are included in the sample. This gave a chance to get
response from stream of professionals who engage in capital budgeting practice as a regular job
or as ad hoc committee members.

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 4.3 Capital Budgeting Techniques applied

In verifying what capital budgeting techniques, the corporation applied, the study reviewed
documents related to capital budgeting practices of the corporation. The corporation’s capital
budgeting practices policy and procedure document clearly indicate profitability index
technique should be applied for every investment that involves high amount of investment
funds. The document states when an investment involves high amount of funds above
500,000.00 Br. The guideline clearly set the use of Profitability index (PI) technique as
investment evaluation technique. In addition, revision of practical document also shows the
corporation used this technique for all investments exceeding the above threshold. The policy
and procedure document reveals the advantage of using profitability index from context of
easiness and consideration of time value of money. Interview is conducted to plan and program
executive officer of the corporation for the same issue and it is found that profitability index is
the applied technique in the evaluation process. This is in line with the empirical findings of
Anand &Monoj (2002) and Jane & Yadav (2002), that Profitability index (PI) is used more by
public sector units than private sector firms. Keown et el.,(2003) declare that profitability index
criterion yields the same accept reject decision as the net present value criterion and it
recognizes the timing of cash flows and is consistent with value maximization objective of
firms.

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Table 4.3. 1: Capital budgeting task organization
Percentage of
Capital Budgeting task No of Respondents Mean S.dev.
Respon
organization ds. SA A N DA SD Score
1 The corporation has a
responsible department for
46 50.00 30.40 8.70 4.30 6.50 4.13 1.16
evaluating capital
investments.
2 The corporation uses
formal policy & procedure
46 45.70 43.50 6.50 4.30 0.00 4.30 0.78
in its capital budgeting
practices.

3 The capital budgeting

team is well organized and 46 17.40 41.30 21.70 15.20 4.30 3.52 1.09
well trained. /

4 Specially trained
employees participate in 46 15.20 43.50 21.70 6.50 13.00 3.41 1.22
capital budgeting practice.

Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree (A) and
5=Strongly Agree (SA)
Source: Case study results, 2018.
The above table clearly shows the existence of well-organized capital budgeting task in the
corporation. The existence of responsible department for capital budgeting practices is
demonstrated by 50% strong agreement by respondents. The mean score of 4.13 is also confirms
this. But the standard value of 1.16 exhibits the existence of response variability among
respondents. It is found through document review that the corporation has responsible
department for its capital budgeting work process. This department’s work process is governed
by formal policy and procedure document. This is confirmed by 45.7% strong agreement and 4.3
mean score. The standard deviation value of .78 also shows the existence of non-variability in
respondent’s answer. The existence of well-organized and well-trained manpower for the job is
demonstrated by 41.3% agreement and 3.52 mean score. The standard deviation value of 1.09
confirms the same. The participation of specially trained employees is confirmed by 43.50% of
respondents. Mean score of 1.22 shows the existence of variability of response. The regular

25 | P a g e
updates of policy and procedure document is confirmed by response rate of 32.60% and mean
score of 3.26. Standard deviation value of 1.30 shows the existence of response variability
among respondents. According to Slagmulder (1995) the support of a committed project
champion appeared to have a significant positive impact on the investment decisions.
Table 4.3.2: Capital budgeting task planning
No of Percentage of respondent Mean
Capital Budgeting task planning S.dev.
Respo. SA A N DA SD Score
Capital investment practice is
1 46 32.60 52.20 8.70 4.30 2.20 4.08 0.89
aligned with its strategic plan.
The corporation develops and
formulates long term strategic
2 46 32.60 60.90 4.30 0.00 2.20 4.23 0.63
goals which direct its capital
investments.
Investment proposals are initiated
at lower-level management
3 46 43.50 43.50 6.50 4.30 2.20 4.21 0.91
followed by revision by top level
management.
Unproductive investment is
significantly reduced/avoided)
4 46 13.00 54.30 13.00 17.40 2.20 3.58 1.00
with better information sharing
across units.
Capital asset underutilization is
avoided by sharing resources
5 46 17.40 43.50 19.60 17.40 2.20 3.56 1.04
from excess unit to other units
which are in short fall.

Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree

(A) and 5=Strongly Agree (SA)
Source: Case study results, 2018
The data collected to assess how capital budgeting task planning shows the existence of
sound capital budgeting task planning practice in the corporation. 52.20% respondents agree
about the alignment of capital investment practice and mean score of 4.08 also confirm this.

Standard deviation value of 0.89 shows the non-variability of responses. From document review
it is found that investments should always consider the strategic direction of the corporation.
Capital investments governance by strategic goals is demonstrated by
respondents’ agreement rate of 60.90% and mean score of 4.23 clearly shows the same.
Standard deviation value of 0.63 shows the non-variability of responses to this regard. The
initiation of investment proposals at lower level followed by revision by top level
management is manifested by strong agreement by 43.50% respondents and mean score of

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 4.21 confirms the same. Standard deviation value of 0.91 shows the respondents agreement
to this. The existence of efficient utilization of resources is agreed by 54.30% of respondents’
and mean score of 3.58 shows the same. The standard deviation value of 1.00 shows non-
variability of answers. Resource is shared across units for efficiency and this is demonstrated
by response rate of 43.50% and means score of 3.56. Standard deviation value of 1.04 shows
the non-variability of responses to this regard.

Table 4.3. 3: Capital budgeting evaluation task

Percentage of respondent Mean Sdev.

Capital Budgeting Evaluation No of
Task Respo SA A N DA S D Score

The corporation’s Management

and the capital Budgeting
1 department understand The 46 21.70 65.20 4.30 6.50 2.20 3.97 0.85
significance of their Proper
decision.

The capital budgeting Practice

sometime conducted by Adhoc
2 approach to fill a gap of 46 28.30 54.30 10.90 4.30 2.20 4.02 0.88
expertise needed.

The capital budgeting Practices

3 consider uncertainty Factors 46 17.40 52.20 19.60 10.90 0.00 3.76 0.87
associated with the investment.

Long term investments receive

greater attention than other
4 investments. 46 30.40 56.50 4.30 2.20 6.50 4.02 1.02

Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree (A)
and 5=Strongly Agree (SA)

Source: Case study results, 2018

The capital budgeting evaluation task is shown to be well organized and addressed. The
significance of capital budgeting decisions is well understood by practitioners in the
corporation. This is shown by 65.20% agreement by respondents and mean score of 3.97
demonstrates that. Standard deviation value of 0.85 shows the existence of general agreement

27 | P a g e
by respondents. The existence of adhoc approach to fill expertise gap in capital budgeting
practice is agreed by 54.30% of respondents. Mean score of 4.02 shows the same. Standard
value of 0.88 shows the non-variability of responses in this respect. Consideration of future
uncertainty is also the issue of the practice and this is confirmed by 52.20% of respondents.
Mean score of 3.76 shows the same. Standard value of 0.87 manifests the existence of general
agreement to the case by respondents. Attention to long term investment is an issue in the
practice. This is demonstrated by 56.50% agreement of respondents and mean score of 4.02
states the same. The standard deviation value of 1.02 shows less variability of answers by
respondents. Bhalla (2004) and Khan & Jain (2007) demonstrates the importance of placing
greater emphasis on capital expenditure decisions. The result is in line to the theoretical
requirements.

Table 4.3. 4: Capital investment selection task

Capital Investment selection Percentage of respondent

No of Mean S.dev.
task Respo. SA A N DA SD Score
The capital budgeting process
facilitates the transfer of 46 30.40 60.90 6.50 2.20 0.00 4.19 0.65
1
information to the appropriate
decision makers.
There are pre-established criteria
to create a set of decision rules
2 46 22.20 46.70 17.80 8.90 4.40 3.73 1.05
that can categorize which project
is acceptable.
The corporation’s top
management is committed to
3 capital budgeting practices and 46 41.30 50.00 6.50 2.20 0.00 4.30 0.69
are actively involved in the
decision making process.
Capital budgeting decisions are
made by top level management
4 46 43.50 45.70 4.30 2.20 4.30 4.21 0.96
following the investment proposal
evaluation.
Prioritizing investment is the

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 responsibility of top management
5 46 54.30 39.10 2.20 0.00 4.30 4.39 0.90
and their decision is based on the
importance of the investment.
The management board is the
6 ultimate body in approving 46 54.30 32.60 4.30 4.30 4.30 4.28 1.04
capital investments.
Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree (A)
and 5=Strongly Agree (SA)

Source: Case study results, 2018.

Responses to questions in the above table concerning capital investment selection task shows
that capital investment selection task is well conducted from the point of the parameters
mentioned in the questionnaires. Decision makers are well informed, and this is demonstrated by
60.90% agreement by respondents. The mean score of 4.19 clearly show the same. The standard
deviation value of 0.65 shows the existence of agreement to the same. The adherence to pre-
established criterion in decision making is agreed by 46.70% of respondents. The mean score of
3.75 demonstrates the same. The standard deviation value of 1.05 slightly shows the non-
variability of responses by respondents. Top management commitment existence is confirmed by
50% agreement and means score value of 4.30 shows the same. Standard deviation value of 0.69
shows the non-variability of responses in this regard. Decisions of capital investment are done by
top management and this is confirmed by 45.70% of respondents. Mean score value of 4.21
shows the same. Standard deviation value of 0.96 shows non-variability of responses. Strategic
importance of investments is the criterion for prioritizing, and this is confirmed by 54.30%
strong agreement by respondents. Mean score value of 4.39 shows the same. Standard deviation
value of 0.90 shows the non-variability of

responses by respondents. Management board’s ultimate power in approving capital

investment is confirmed by 54.30% of strong agreement by respondents. Mean score value of
4.28 shows the same. Standard deviation value of 1.04 shows the existence of slight
variability in responses. Document review work shows the board only gives decisions for
capital investments beyond one-million-birr threshold. Interview with plan and program
executive officer also confirm this. Bhalla (2004) classified the entire capital budgeting
process in six phases, and investment selection process is one issue that receives greater
attention by management.

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Table 4.3. 5: Capital budgeting implementation task

Capital budget implementation Percentage of respondent Mean S.dev.

No of
task Respo SA A N DA SD Score
Capital investment
implementation activity is
1 46 34.80 52.20 4.30 4.30 4.30 4.08 0.98
conducted based on the
management’s decision.
Regular investment
implementation report is
2 46 39.10 37.00 13.00 6.50 4.30 4.00 1.09
produced and revised by
management.
Prompt corrective actions taken

3 for any irregularity in investment 46 43.50 28.30 17.40 6.50 4.30 4.00 1.13
implementation activity.

Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree (A)
and 5=Strongly Agree (SA)

Source: Case study results, 2018.

The above table clearly shows the respondents agreement to the management’s exclusive
decision-making role in investment implementation activity and this is demonstrated by
52.20% agreements by respondents. The mean score value of 4.08 shows the same. The
standard deviation value of 0.98 manifests the non-variability of responses. Investment
reports are regularly revised by management for prompt corrective action and this is
demonstrated by 39.10% strong agreement by respondents. The mean score of 4.00 shows
the same and standard deviation value of 1.09 slightly shows the non-variability of
responses. Irregularity is promptly corrected, and this is demonstrated by strong
agreement by 43.50% of respondents. The mean score value of 4.00 shows the same and
standard deviation value of 1.13 shows the existence of variability in responses. Bhalla
(2004) states implementation phase as one important part in capital budgeting practices.
Table 4.3. 6: Post Investment Evaluation Task

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 No of Percentage of respondent Mean S.dev.
Post investment Evaluation task Resp. SA A N DA SD Score

Post investment monitoring and

control procedures are applied to
1 46 32.60 39.10 8.70 13.00 6.50 3.78 1.22
make sure whether investments
achieve the expected goals.
Independent department exist to
evaluate capital investments which 46 21.70 37.00 10.90 13.00 17.40 3.32 1.41
2
can perform its duty without any
interference.
Audit findings are adequately
3 addressed by management for future 46 32.60 30.40 21.70 6.50 8.70 3.71 1.24
improvement.
The corporation’s management
regularly revises its policy &
4 46 17.40 41.30 28.30 4.30 8.70 3.54 1.10
procedures for post implementation
audit work.
There exist pre investment audit
procedures that insure adherence to 46 19.60 37.00 28.30 6.50 8.70 3.52 1.14
5
established criterion in project

evaluation process.
There exists pre-established policy &
6 procedures for evaluating capital 46 19.60 45.70 13.00 10.90 10.90 3.52 1.24
investments.
There is accountability for capital
7 46 19.60 56.50 15.20 4.30 4.30 3.82 0.94
budgeting malpractices.

Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree

(A) and 5=Strongly Agree (SA)
Source: Case study results, 2018.

The corporation’s post implementation evaluation task exhibits the existence of sound business
practice based on the results of the respondent’s feedback. Post investment monitoring and
control procedure is applied, and this is confirmed by 39.10% agreement by respondents. The
mean score value of 3.78 demonstrates the same. Standard deviation value of 1.22 shows the
variability of responses to this issue. Post investment monitoring and control is done
independently, and this is confirmed by 37.00% agreement by respondents. The mean score
value of 3.32 also show the same. But the standard deviation value of 1.41 shows the existence
of response variability. Audit findings are well addressed, and it is confirmed by 32.60% strong
agreement by respondents. Mean score value of 3.71 shows the same. Standard deviation value
of 1.24 demonstrates the variability of responses. Regular revision of policy and procedure

31 | P a g e
documents is done, and this is confirmed by 41.30% of respondents and standard deviation value
of 1.10 shows variability in response. Adherence to established criterion is tested before
investment and it is confirmed by 37% agreement by respondents. Mean score value of 3.52
shows the same. Standard deviation value of 1.14 demonstrates the existence of variability in
response. The existence of audit guideline in investment monitoring and control is confirmed by
45.70% agreement by respondents. Mean score value of 3.52 shows the same. Standard deviation
value of 1.24 manifests the existence of variability in responses. Accountability for malpractice
is confirmed by 56.50% agreement by respondents. Mean score value of 3.82 demonstrates the
same. The standard deviation value of 0.94 shows the non-variability of responses. In
triangulating the variability of responses, documents are revised and interview is conducted and
it is found out that post investment evaluation task is performed as stipulated in the questions.
Prompt corrective action is made based on findings of post investment evaluation work. Bahala
(2004) clearly stated the importance of auditing phase in capital budgeting practices as a source
of prompt decision making opportunity for malpractices.

Table 4.3. 7 : Challenges in Capital Budgeting Practices

No of Percentage of respondent Mean

Post investment Evaluation task
Respo SA A N DA SD Score S.dev.
There exists possibility of
1 rejection of investment 46 6.50 37.00 19.60 26.10 10.90 3.02 1.16
proposal.
There exists unregulated
2 46 2.20 30.40 15.20 39.10 13.00 2.69 1.11
capital budgeting practice.
There exists capital investment
3 short falls that will lead to 46 10.90 54.30 10.90 19.60 4.30 3.47 1.06
prioritization.
There exist government
regulations that hinder the use 46 4.30 45.70 6.50 32.60 10.90 3.00 1.19
4
of funds for certain
investments.
Lack of adequate management
5 commitment & involvement 46 15.20 15.20 17.40 34.80 17.40 2.76 1.33
are the big challenge.
Lack of well-trained capital
6 budgeting staffs make capital 46 15.20 28.30 23.90 23.90 8.70 3.17 1.21
budgeting practice difficult.
The nonexistent of
accountability in capital
budgeting malpractices make
7 46 8.70 19.60 23.90 41.30 6.50 2.82 1.10
the practice to be unregulated
which leads to inefficient
investment.

32 | P a g e
 The non-existences of clearly
stipulated guide lines make
8 46 23.90 19.60 21.70 28.30 6.50 3.26 1.28
capital budgeting practice to
be inefficient.
The nonexistent of regular pre
and post audit makes difficult 46 19.60 13.00 19.60 37.00 10.90 2.93 1.32
9
capital budgeting practice to
be efficient.
Future cash flow estimate 46 6.50 21.70 28.30 28.30 15.20 2.76 1.15
10
would not be done properly.
Capital budgeting techniques
11 46 13.50 15.20 30.40 30.40 10.90 2.89 1.19
may not be used properly.

Note: 1= Strongly Disagree (SD), 2= Disagree (DA), 3=Neutral (N), 4=Agree (A) and
5=Strongly Agree (SA)

Source: Case study results, 2018.

The study designed eleven questions to investigate challenges that may face the corporation in its
capital budgeting practices.

Based on the analysis of the respondent’s level of agreement 37% of them agreed that the
existence of possibility of rejection of investment proposal. The mean score of 3.02 shows the
existence of this challenge. The standard deviation value of 1.16 demonstrates the variability of
responses. The researcher interviewed corporate plan and program executive officer to clarify
reason for rejection of investment which qualifies the investment evaluation criterion and found
that some investment proposal may be rejected for reason of investment short fall that may face
the corporation for unforeseen reasons.

Concerning the existence of unregulated capital budgeting practice even if 30.40% of the
respondents agree, the mean score of 2.69 shows that this challenge may not threatened the
corporation’s capital budgeting practice. The standard deviation value of 1.11 shows variability
of responses. In triangulating the response capital budgeting monitoring and control work
documents are reviewed and no major deviation is reported.

Capital investment short fall is also mentioned to be challenge in capital budgeting practices and
54.30% of respondents agree to the same. The mean score value of 3.47 also shows the general

33 | P a g e
agreement by respondents to this issue. Standard deviation value of 1.06 shows slight variability
in responses.

Government regulations hinder the use of funds for investment is found out to be a challenge and
45.70% of respondents agree to the issue. Mean score of 3 imply that the respondents’ position is
not valid. The standard deviation value of 1.19 shows variability of responses. Interview is
conducted with plan and program executive officer of the corporation to triangulate the result
and found out that the existence of some regulation on the use of annual profit. In the past most
of the corporation’s profit is going to be paid as dividend to the government. This problem is
currently smoothened by the government by allowing the corporation to use its profit to expand
its business activity till the authorized capital is totally paid. Lack of adequate management
commitment is not a challenge in capital budgeting practice of the corporation. 34.80% of
respondents disagree to this and mean score of 2.76 also confirm this. Standard deviation value
of 1.33 shows variability in response. Lack of well-trained capital budgeting staff is agreed to be
a challenge by 28.30% of respondents and the mean score of 3.17 also confirms this. Standard
deviation value of 1.21 shows variability of responses. This result contradicts to the result found
under table 5 item numbers 3 which states the existence of well-trained employee. The
researcher tried to clarify this contradiction by interviewing the concerned officials. The officials
responded even if there are well trained staffs to the job, they expressed the existence of
knowledge gap of on some specialization issue.

Professional non accountability is not a challenge in the capital budgeting practice. 41.30% of
respondents disagree to the questionnaire concerning this issue. The mean score of 2.82 also
confirms this. Standard deviation value of 1.10 shows variability of responses.

The researcher designed a question to assess the nonexistence of clear guideline to the practice
and found that 23.90% of respondents agree to the same. The mean score of 3.26 also confirm
this. Standard deviation value of 1.28 shows variability of responses. This result contradicts with
table 5 item number 2. To get clarification interview is conducted with the corporate plan and
program executive officer and found that even if there exist policy and procedure document to
the practice, it does not encompass all issues that may come across in the capital budgeting
practice of the corporation.

34 | P a g e
The non-existence of regular pre- and post-audit work is not a challenge, and this is confirmed
by 37% of respondents. Mean score of 2.93 confirms this. Standard deviation value of 1.15
implies the existence of variability in responses. Non-proper future cash flow estimate is not the
challenge, and this is confirmed by 28.30% disagreement to the question. Mean score of 2.76
confirm the same. Standard deviation value of 1.15 shows variability of responses. Improper
application of capital budgeting techniques is not a challenge, and this is confirmed by 30.40%
disagreement to the question. Mean score of 2.89 shows the same. Standard deviation value of
1.19 demonstrates variability of responses. In triangulating the responses capital budgeting
monitoring and control work and capital budget practice documents are reviewed and no major
deviation is reported.

35 | P a g e
Chapter Five

5. Summary of Findings, Conclusion and Recommendation

The earlier chapter presented the results and discussion, whereas this chapter presents summary
of findings in section 5.1, section 5.2 presents conclusion, followed by section 5.3 which deals
with recommendation. Finally, future research direction will be indicated in section 5.4.

5.1 Summary of Findings

This Study tried to assess the capital budgeting practices of Ambo Mineral Water SC. Experts
and officers who directly participate in the practice are selected as a sample to provide answers
to the questionnaire designed based on literature review. This questionnaire is designed to assess
whether the capital budgeting practices of the corporation adheres the theory and the
international practices parameters based on the literature review.

Based on the document review and interview conducted the corporation is found to use
profitability index technique for evaluating capital investments. This technique is applied for
every investment which have above five hundred-thousand-birr threshold. The technique is
preferred from context of easiness and consideration of time value of money. Anand & Monoj
(2002) and Jain & Yadev (2002) found that profitability index technique is used more by public
sector units than private sector firms. Future cash flow estimating procedures is also applied in
the capital budgeting practices of the corporation in using profitability index technique.

The corporation’s capital budgeting task organization is found to have responsible department
for the work process, the work process is found to be governed by formal policy and procedure
guideline, the guideline also found to be regularly updated and well-trained work force is found
to engage in the work process. The above findings are in line with Slagmulder (1995) findings
that state the support of a committed project champion to have a significant positive impact on
investment decisions. Concerning capital budgeting task planning it is found that the corporation
capital budgeting practices is directed strategically and coordinated activity contribute for
efficient utilization of resources. The capital budgeting evaluation task is found to be conducted
responsibly with adequate expertise and long-term investment decisions are done considering
uncertainty factors and greater attention is deployed to long term investment that involve vast

36 | P a g e
amount of money. Capital investment selection task is found to be the priority of top-level
management. The findings are in line with Bhalla (2004) who states investment selection process
is one issue that receives greater attention by management. The investment implementation
activity is found to be regularly followed by management and corrective action is found to be
taken promptly. This finding is in line with Bhalla (2004) who states that implementation phase
as an important part in capital budgeting practices. The post investment evaluation task is found
to be well organized, guided by pre-established policy and procedure document and audit
findings are regularly addressed by management for taking corrective actions. The finding is in
line with Bahalla (2004) statement that states auditing phase as a source of prompt decision
making opportunity for malpractices. The corporation is found to face challenges from short fall
of funds for investments which lead to rejection of some investment which is vital to the
corporation’s business. In addition, lack of well-trained capital budgeting staff for some special
attention requiring investments also is found to be a challenge to the business practice in the
corporation. The non-existence of clearly stipulated guidelines is also another challenge that
makes capital budgeting practice difficult.

5.2 Conclusion

Literatures show that capital budgeting discipline is one of the most strategic decisions that
determine the future of businesses. The question is whether there exist good capital budgeting
practices and hence maximizes the value of the firm. Extensive prior research findings which are
done on developed countries have provided evidence of the need to sound capital budgeting
practices for better performance of firms.

The main objective of this study was to assess the capital budgeting practices of Ambo Mineral
Water SC. To achieve the intended objective the study used quantitative approach using Likert
scale rating in assessing the capital budgeting practices of the corporation. Qualitative approach
is applied to analyze data collected through interview and document review. The results of the
study show that the corporation uses profitability index as an investment evaluation technique,
which is in line with empirical evidence discussed in chapter two. The capital budgeting
practices of the corporation is found to be well organized from investment planning to post
investment evaluation work process. This is clearly stated in the summary of finding section of
the report.

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 5.3 Recommendation

The researcher recommends to the management of the corporation to focus on short term training
to fill the gap of knowledge which is implicated to exist in the study. In addition, the corporation
should try to revise its capital budgeting policy and procedure document which is found to be a
challenge in capital budgeting practice. The revision should be done by a concerned body to
include detail issue which is part and parcel of the business practice. Making this will facilitate
standardized business practice in the corporation.

The corporation’s strategic plan document which is revised by the researcher indicates the need
of alignment of capital investment with the strategic plan of the corporation. But the document
lacks clarity as to how this alignment should be maintained. Therefore, the corporation’s
management should review its strategic plan document to address this problem.

5.4 Future Research

This study tried out to assess the capital budgeting practice of Ambo Mineral Water SC. The
findings of the research are based on the research questionnaire, interview and document review
feedback. The result of the study found that the corporation’s capital budgeting practices are in
line with the theoretical aspect and some findings are in congruence with empirical findings
included in the empirical literature review. But as this study is conducted on a single entity, its
findings cannot be generalized. Therefore, the researcher would recommend future researchers to
engage in other study which can be generalized to the public sector of the country.

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