Question

Find an article relating to Cost of Capital or Capital Budgeting from any medium, briefly summarize the article, explain how you found the article particularly useful or timely, and give your personal reactions to the article. Be sure to provide the title of the article, the author(s), and the reference for the article.

Answer 1

The article talks about the importance of capital budgeting particularly in today’s age of highly competitive business environment. The high intensity of competition makes capital investment decisions critical success factors for an organization. Thus it is important for companies and their management to understand suitable capital budgeting techniques. The research done by different individuals have shown that the widely used and acceptable capital budgeting techniques are NPV (net present value) and IRR (internal rate of return). This was concluded after an in-depth research was done on different industries like the pharmaceutical industry, the chemical industry, textile industry etc.

I found the article particularly useful as it gave me a practical insight as to how companies in different industries and different countries go about using the capital budgeting techniques. Whatever may be the technique the objective is the same – to maximize returns for the shareholders and to create greatest possible value.

My personal reaction to the article is that the author has been able to clearly demonstrate why different industries prefer different methods of capital budgeting. While there are sector wise differences in the techniques the part that I found most interesting was that how the author illustrates the fact that the underlying principle was mostly the same for all the techniques. The underlying principle was that of the discounted cash flows (DCF).

Title of the article: Capital Budgeting Practices

Author: Ramesh, S. and Nimalathasan, B.

Reference for the article: https://www.researchgate.net/publication/216521305_Capital_Budgeting_Practices_A_Study_of_Companies_Listed_on_the_Colombo_Stock_Exchange_Sri_Lanka