Factors Affecting Capital Budgeting of ICT Sector Firms
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This research proposal has been written to compare the factors affecting capital budgeting of firms in Information and Communication Technology sector in Thai. The survey factors of decision making in capital budgeting. The many decisions that top management must make in firms. This method is one duty of a financial manager to choose investments with satisfactory cash flows and rates of return. The factors affecting to make decision in capital budgeting, which is the allocation of funds among alternative investment opportunities, is crucial to corporate success. The explicitly considers how well-managed companies and the competition to hook up in segment market of in information and communication technology sector.
Overview of Information and Communication's firms in Thailand
The most economies in the world people consume by spending money to buy goods and services. The ultimate aim of business is to maximize the market value of the firm's common stock. Whereby, this means the wealth of its shareholders (Sharpiro 2005). The purpose focus on shareholder value begins with the simple economic understanding. Therefore, the roles of current business can growth through affecting quality competition. This research proposal has the interest in the sense of decision making style in ICT sector. Competitions exist to give the opportunity to enter the best competitions to be found in this kind of business in Thailand. A more captivating reason for focusing on creating shareholder wealth is the difference between the values of the company. Moreover, Companies in ICT sector are highly competitive market in Thailand. That the reason why the significant decision making of capital budgeting to invest by critical thinking. Verma et al (2009) observed for achieve the firms are focusing even more on effective financial management practices and are greatly concerned about core financial issues like capital structure, cost of capital, working capital management and capital budgeting.
The objective of capital budgeting
In the recent years, managers have become more sophisticated in allocating capital resources and more concerned about return on investment. Sharpiro (2005) shows the important discussion is that the primary objective of financial management is to maximize the shareholder wealth. In other to, we need to know what affects wealth to benefit shareholders. Consequently, one way that people acquire more wealth is to defer invest and consumption in a company. Those who are relatively risk averse become bondholder, lending money to the company and repayment of the loan.In reality, any firm has limited capital resources that should be allocated among the best investment alternatives. The argument that capital is a limited resource is true of any form of capital. Management should carefully decide whether a particular project is economically acceptable. In the case of more than one project management must identify the projects that will contribute most to profits and to the value or wealth of the firm which is the basis of capital budgeting. Stout (2008) expresses the process of evaluating the desirability of investment is referred to a capital budgeting with real options. Furthermore, illustrate how to price a capital investment project containing real options. To explain these concepts to a wide audience in accounting
In addition, this research proposal represent evaluate business strategies on the basis of prospective in capital budgeting by opinion managers who controls the capital resources is managerial decision from sample companies in ICT sector, which is good for every one, not just shareholders. It is well for politicians and other commentators to reflect on the facts in issue.
Critical review of Literature
This research generalized how company make financial decisions that started by explaining what these decisions are and what they are seeking an achievement. The secret of success in financial management of a corporation depends on how well in system of corporate governance to increase value. In other wards, maximizing value is like advising an investor in the stock market. To carry on business, a corporation needs a limitation to describe investment decision. The investment decision also involves purchase of assets that are often referred to as capital budgeting. The most corporations focus on capital budgeting listing the major project approved for investment. Investment proposal come into view from many different parts of the organisation that may have concluded the simple choice of which projects to accept or reject. Hence corporations need processes to ensure that every project is assessed consistently. The future investment outlays in most companies depend on the investment procedure starts with the preparation of annual capital budgeting that is a list of projects planned for investment decision. The investment decisions let project proposals from companies for review by planning staff who controls the disposition of corporate resources is making financial decision (Brealey et al., 2011). Furthermore, Burns and Walker (2009) represented the capital budgeting process has been described in terms of four stages:
Firstly, Identification is idea generation that include how project proposals are initiated. This stage composes of the overall procedure of project including sources origination and reasons for idea creation. Besides, process of origination and submission procedures are interested in an incentive system for rewarding good ideas. Moreover, this stage focuses on time pattern of creation and what level projects are generated that is a formal process for accepting ideas. Stanley and Block (1984) surveyed there has never been an in-depth survey in this stage. The responding companies in capital budgeting proposals originated bottom up over 80 percent versus top down.
Secondly, Development also focuses on the details of how the data is estimated that which firms use cash flow versus accounting data. This involves the level of review, the role of project size, organizational structure and the initial screening process which rely upon primarily early screening criteria and cash flow estimation. Pruitt and Gitman (1987) identified the origination of biases in process for a deeper understanding of capital budgeting forecast and cash flow estimation. In addition, they considered financial, marketing, production and economic factors for quantitative forecast. Gordon and Pinches (1984) suggested the role in forecast accuracy and emphasis on the importance of information systems processes that were the key to improvement of capital budgeting.
Thirdly, Selection includes personnel involved and the techniques used for the detailed project analysis that results in acceptance or rejection of the experimental project for funding. This stage separate to subsections follows as:
1. Personnel study on determining person who controls the disposition of corporate resources in company is making final decision and analyses capital expenditures. However, this includes amount of people are involved in project. Brealey et al. (2011) suggested the problem of biased forecasts that originated from strategic planners may have a mistaken view of forecast because cannot identify all worthwhile projects. For instance, the managers of project A and B cannot be expected to see the potential economies of closing their projects and merging production at new project C.
2. Reason for selection Techniques includes determining some techniques are preferred. According to Verma et al. (2009) demonstrated Companies invest in long term assets that expected a flow of benefit over the lifetime of the capital asset in project and a certain amount of resources in exchange for the future return that involves risk. Moreover the many capital budgeting methods or techniques are available for these investments or projects evaluation. A comparative study of affecting capital budgeting by evaluate the impact of different factors or variables on the selection of an individual capital budgeting. In addition, this research covers capital budgeting principles and techniques. Shapiro (2005) represented the companies can use to evaluate prospective investments. To accomplish this object by translate the basic principles of capital budgeting into evaluation techniques capable of applying these principles. The several different methods evaluate potential projects that managers use to analyse investments. The alternative methods include:
Firstly, three discounted cash flow techniques - net present value, profitability index and internal rate of return. The techniques are defined as follows: Net present value (NPV) is the present value of the project's future cash flows that discount at appropriate cost of capital and minus the initial net cash outlay in cost of the project. The value placed on a prospective investment project that focus on cash and only cash, account for the time value of money and account for risk. Thus, projects have a positive NPV that should be accepted. On the other hands, a negative NPV should be rejected. Moreover, Comparison in many projects that the one with higher NPV should be accepted. This NPV method focuses on all cash flows and the time value money when takes into account. Profitability index (PI) is defined as a project equals the present value of future cash flows divided by the initial cash investment as known as the benefit cost ratio. The project should be accepted if the ratio exceeds 1.00. NPV and this ratio always yield the same accept-reject decision. Sometimes, PI can provide superior decision in investment. Internal rate return (IRR) is defined as the sets of present value in project of future cash flows equal to the initial investment outlay that is a discount rate. In other words, this ratio equates the project when NPV is zero that determines the maximum interest rate. The rationale in project yielding more than its cost of capital should have a positive NPV and should be accepted. Otherwise, the project should be rejected.
Secondly, two non discounted cash flow techniques - payback period and accounting rate of return. The techniques are defined as follows: Payback period is defined as length of time necessary to recover it takes before the accumulative cash flow equals the initial investment from net cash flows. The payback rule states that project should be accepted if payback period less than some specified cut-off period or less period than others project. Payback period was a most commonly to use when choosing among alternative projects. Although widely to use this method, it has serious weakness because this method ignores the cash flows beyond the period and the time value of money that is very sensitive in investment decision.
Accounting rate of return also called as the average return on book value or the average rate of return. This technique is the ratio that defined average profit after taxation to average book investment this is an average return on investment (ROI). A return in investment yielding grater than in comparison project and standard should be accepted. Whereas the result is below should be rejected.
In addition, Verma et al. (2009) represented the comparisons capital budgeting techniques used in practice. A non-discounted cash flow in capital budgeting techniques was increasing in 1960s especially the payback period method. On the other hands, a discounted cash flow in capital budgeting techniques were interesting 1970s especially use of internal rate of return method in. A trend towards incorporation focused on risk that was also indicated by many studied. Furthermore, the most preferred method for evaluation of investment risk that depended on sensitivity conservative and analysis forecasts and the payback period method and followed by internal rate of return method were most popular in 1980s. Authors found that evaluators used multiple evaluation methods that internal rate of return and followed by the net present Value method were the most preferred choice in 1990s. The adjustment of discount rate methods were the most widely accepted discount rate that was the weighted average cost of capital (WACC) that Authors found 78 percent. In the 2000s, Peat and Partington (2007) demonstrated the most popular project evaluation techniques were net present value, internal rate of return and payback period that the most of companies observed these techniques.
3. WACC is defined a usually estimated cost of capital that average rate of return demanded by investors include companies use this rate to make project selections. Bruner et al. (1998) represented the research that companies computed the cost of capital by using WACC.
4. Risk Analysis is actually defined in a capital budgeting context. The risk analysis methods focus on recognised, reflected and assessed. Shapiro (2005) represented the real options and project analysis, risk and incorporating risk in a capital budgeting analysis, corporate strategy and the capital budgeting decision. The improvements could be made in obtaining.The important input from management for improving existing risk models. Ken and Cherukuri (1991) represented the case of large U.S. companies that concluded sensitivity analysis was found popular for handling risk that measuring risk is 80 percent. Dhanker (1995) demonstrated companies incorporated risk by adjusting 45 percent used Capital Asset Pricing Model (CAPM). Shao and Shao (1996) found that firms were using risk-adjusted discount rates less often than risk-adjusted cash flows.In addition, Graham and Harvey's (2002) surveyed large companies are preferred to use risk-adjusted discount rate while small companies more likely used Monte Carlo simulation for risk adjustment.
5. Capital Rationing include the decisions are made by the financial environment. The specific reasons in capital rationing indicate the correct project proposal biases. The reaction capital rationing is not simply to real problem in managers' face that main reason was irresolution to issue external financing. Moreover, accepting projects are avoided highly risk averse by using capital rationing to make decision in company that correct for management optimistic forecast biases. In addition, Gitman and Vandenberg (2000) considered the maintain a target price to earning ratio or earning per share among 23 percent of the respondents using of capital rationing and 60 percent was a debt limit imposed by management. Thus, this improvement has been made on the characteristic of capital rationing.
6. Project Approval as defined the autonomy of divisional managers and the role of divisional manager in each of capital investment project and operating accept-reject decisions.
Fourthly, Control involves how the evaluation of project performance. This stage considers by comparison the different in expected result and actual results that indicate the performance measurement. Gordon and Myers (1991) expressed the respondents had performed post-audits 76 percent. However, the post-auditing was not effective according to criteria that involved the use of risk adjusted discount rate cash flow methods, the documented policies and procedures. Unfortunately, the post-audit is unpopular decisions in a standard part of the capital budgeting process. Furthermore, Myers, Gordon and Hamer (1991) found companies by using discounted cash flow based audit procedures by using the data form the same study that result increased their performance in companies. In addition, Pruitt and Gitman (1987) reviewed an upward bias that management suspects that focus on the post-audit process. The optimistic forecasts were sometimes depended on psychological factors. The way to eliminate the psychological biases on future capital budgeting proposals that means the post-audit should provide objective information to remove psychological to effective capital budgeting. The important in control stage has resulted in the deeper understanding in both control purposes and continuous improvement for future decisions. The important contributions have been made in the omitted stages of the capital budgeting process. A set of well-defined capital investment opportunities suggested by several authors its impact on all four stages that the decision support system. Opportunities include focusing on a particular stage by using best practices perspective in the area of real options and project analysis to monitor the outcomes.
Brealey et al. (2011) demonstrated the final capital budget must also reflect the strategic planning of corporation. Strategic planning attempts to identify business where the corporation has a competitive advantage that takes a top -down view of company.
Research aims and objectives of research proposal
The objectives of the study are to examine the capital budgeting practices being adopted by companies in Thailand. Specifically this study aims a comparative study of the factors affecting of different firms in capital budgeting in Information & Communication Technology sector. The overall research focuses on objective as following:
- This objective examines the corporate practices regarding the techniques of capital budgeting used for evaluating an investment proposal.
- To analyse and compare the difference objectives of capital budgeting by using acquired data.
- This objective evaluates the impact of different variables or factors affecting capital budgeting on the selection of a method of capital budgeting technique.
- This objective analyses the corporate practices regarding risk techniques of capital budgeting used for adjusting risk in investment proposals.
- This objective includes the affecting factors in each project and corporate strategy that relate to the capital-budgeting decision.
- To evaluate processes and techniques of capital budgeting to improve decision-making and the quality of decisions.
Research questions and / or hypotheses
H0-What are the purposes and objectives of investment capital budgets in each firm?
H0- The identification, development, selection and control stage does affect the making decision of capital budgeting to accept the project.
H0-The level of capital budget project does affect the selection of investment.
H0-What are a capital budgeting principles and techniques make strategic decisions preferred by companies?
H0-What is the most popular capital budgeting technique affect to make decision?
H0-Does the company use of multiple capital budgeting techniques?
H0- what important factors of decision making are the consideration non financial factors for deciding capital budgeting investment by selected companies?
H0- what are risk factors to use in Adjustments?
Methodology for the research
This section is essentially about justifying the terms of methodology. It addresses the particular appropriate data collection and analysis. By 150 the questionnaires have distributed go to still ICT's companies in Thailand. The Social Science Version 16 (SPSS software) was advantage from this questionnaire. Thus, imply incidence and percentage are the importance in the lead presents the conclusion spits the questionnaire, way statistics explanation is the importance of using analysis the data.
Data collected in standardised format from lot of observations based on specific variables and identify patterns between variables. Hence, Data will be collected via structured by questionnaire (see in appendix) a personnel in companies in information & communication technology sector in Thailand. The population of interest is planning staffs that involve the project within different department in each company. According to the mention above objective a comprehensive primary survey is conducted of 30 planning staffs who controls the disposition of corporate resources is managerial decision involved of project's companies. The planned sample is 10 projects from different projects in company the amount of staff are surveyed depend on the level of project.
Wrenn et al. (2007) represented the SPSS is used the way random simplify by applicability. This technique use to test general in the population that known information of being selected as part of the sample. This research has applied the explanation will of the statistics that Zikmund (2000) demonstrated the explanation and summarize about the people by average calculation that the mean and percent values are majority form in summary data. The acquired data will be analysed by using qualitative methods and data will be compared the actual factors in capital budgeting.
The limitation of method used
According to Saunders et al. (2007) demonstrated the way of questionnaire process depends on the technique of limitation use in the research that is taking time to collects the data. Moreover, they may take time in making completed profoundly might cause something delay in during procedure. The convenience of limitation is easy to filtration that personal researcher are appropriate more than the filtration from the people.
Nowadays, the Thailand business environment has become highly sensitive competition in Information & Communication Technology sector. The capital budgeting decision necessary for a number of changes have taken place in the business and economic environment in domestic market. For achieving this, the keyword to success in financial management depends on only the professionally and competitive managed companies. The companies are focusing even more on effective financial management practices and company can thrive in such an unstable environment. In addition, the companies are greatly concerned about core financial issues. That the reasons why focus on the affecting factors for making decision in capital budgeting that companies should be improved financial management.
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