Abstract:
Capital Budgeting (CB) is one of the most important areas of firms’ decision making process
that contributes to long term growth of the firm. Various Capital Budgeting Techniques
(CBTs) are being widely used among financial expertise. Several techniques are commonly
used to evaluate capital budgeting projects such as discounted cash flow techniques such as
Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) and nondiscounted
cash flow techniques such as Payback Period (PP) and Accounting Rate of Return
(ARR). Recent studies highlighted that financial managers are frequently using these methods
such as the NPV, IRR or PP techniques (Lawrence, et al., 1997). The use of techniques is
varying with different factors including organisations, managers, and size of the project. This
study particularly finds the Capital Budgeting Techniques (CBT) practiced in Sri Lankan
commercial sector organisations. A semi-structured questionnaire survey was conducted to
gather empirical findings with the selected sample. It was found that majority of the firms are
using NPV as a primary CBT while the second is given to IRR and DPP respectively. Some
firms adopt more than one technique to be a primary tool and it was highlighted that NPV
and IRR as the most commonly used combination in the project evolutions. The study found
that majority of the firms adopts Weighted Average Cost of Capital (WACC) as an
independent measure of cost of capital. It was revealed there is a high tendency towards
adopting CBTs to evaluate the projects in Sri Lankan commercial sector.
