Capital budgeting techniques and firm performance in the South African mining industry
Kedige, Itumeleng Mampshe
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.
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
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>