Capital budgeting techniques and firm performance in the South African mining industry
Date
2017
Authors
Kedige, Itumeleng Mampshe
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Abstract
This research investigated the application of capital budgeting and risk analysis techniques and
their effect on company performance in the South African mining industry. Studies
internationally and locally have reported an improved application of capital budgeting
techniques— away from the naïve, non-discounted cash flow techniques of the Payback Period
(PBP) to the more appropriate discounted cash flow methods of Net Present Value (NPV) and
Internal Rate of Return (IRR).
In a survey distributed to the Finance Managers, Officers and Directors of mining companies
in South Africa, we confirmed the increased sophistication in capital budgeting— the results
suggest that 83.3% prefer NPV, 61.5% always use IRR and only 58.3% use PBP. On the other
hand, and in contrast to capital budgeting, risk analysis is still comparatively naïve; with
sensitivity analysis being the dominant technique used in the mining industry. The
sophisticated methods of scenario testing and real option analysis (ROV) are rarely employed.
An empirical analysis on the effects of capital budgeting and risk analysis on company
performance has yielded results in contradiction with the theory of capital budgeting. The
finding of the study is a negative and/or insignificant relation of capital budgeting and risk
analysis sophistication to company performance as measured by return of assets (ROA).
Although this finding is counterintuitive and contradicts theory, it is, however, consistent with international studies of this nature.
Description
A research report submitted to the Wits Business School, University of the Witwatersrand, in partial fulfilment of the requirements for the degree of Master of Management in Finance and Investment, 2016
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Citation
Kedige, Itumeleng Mampshe (2017) Capital budgeting techniques and firm performance in the South African mining industry, University of the Witwatersrand, Johannesburg, <http://hdl.handle.net/10539/23690>