Analysis of Capital Budgeting Practices in Textile Industry in India

ELK ASIA PACIFIC JOURNAL OF FINANCE AND RISK MANAGEMENT
SSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 8 Issue 3 (2017)
www.elkjournals.com
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ANALYSIS OF CAPITAL BUDGETING PRACTICES IN TEXTILE INDUSTRY IN

INDIA
Saurabh Sharma
Indian Institute of Hyderabad
[email protected]
ABSTRACT
This study aims at evaluating the capital budgeting practices employed by the small, medium and some large
scale organizations in the textile sector of Indian industry. For the purpose of the study, textile mills in three
textile hubs of India viz; Ludhiana, Surat and Coimbatore were selected as the sample units. For the above
objective a comprehensive primary survey was conducted for 60 sample companies across the sample frame
selected, so as to find out which capital budgeting technique is more preferred, discounted or non-discounted.
The study further aims to evaluate the impact of different factors or variables on the selection of a particular
capital budgeting technique. For example, it was investigated that whether there exists any relationship between
a size of company’s annual turnover and the method of capital budgeting adopted by it. Similarly it was discovered
that is there any systematic relationship between different company related factors like age of a company, its
financial executive’s education/qualification and the capital budgeting method adopted by it.
Keywords: Capital Budgeting, Textile Industry, NPV, IRR, Payback
INTRODUCTION budgeting techniques or methods are

Firms invest in long term assets in available. While certain companies still
anticipation of an expected flow of benefits prefer old non- discounted less
over the lifetime of the capital asset. It sophisticated techniques, others have
involves sacrifice of a certain amount of moved towards more sophisticated
present resources in exchange for a future discounted cash flow (DCF) techniques.
return and an arbitrage over the time that The traditional non-discounted techniques
involves risk. For evaluating these though used rigorously initially, are today
investments or projects, various capital mostly applied as a supplementary method
in combination with the discounted cash (like NPV and IRR) which take into
flow techniques. account the time value of money. The
The overall objective of the study is to survey also highlights that the use of non-
examine the capital budgeting practices capital budgeting techniques is on the
being adopted by Indian textile companies. decline nevertheless the Payback Period
method still remains in demand as a
Specifically this study aims at:
supplement to the DCF techniques.
 To analyze the use and understanding of Weighted Average Cost of Capital is used
the capital budgeting practices carried
by the majority of the companies in India to
out by the owners or top management of
calculate the Cost of Capital which is used
the start-ups and SMEs in textile
as a discount or cut off rate in companies
industry. using the DCF techniques. This is rightly
 To evaluate the method of estimation of justified because WACC takes into account
the cost of capital of such SMEs in the cost of equity as well as the cost of debt
hosiery industry in Ludhiana, in proportion to their weights. Also,
Coimbatore and Surat. companies do tend to adopt risk techniques
 Evaluating the impact of different along with the traditional supplements like
factors or variables affecting capital ‘Shorter Payback Period’.
budgeting on the selection of a
particular method of capital budgeting It was evident from the studies done on
technique. various foreign and Indian companies that
the size of significantly affect the practice
LITERATURE REVIEW of corporate finance being followed e.g.: It
The survey conducted by Satish Verma, was found large companies were more
Sanjeev Gupta and Roopali Batra shows likely to use Net Present Value(NPV)
that majority of the companies employ technique while smaller firms relied more
capital budgeting techniques so as to avoid upon traditional payback criterion.
any chance of losses while making
investments. Moreover, most of the firms The study done by Vijay M. Jog and
go in for multiple techniques for evaluation Ashwani K. Srivastava based on the capital
of investments. The trend shows that there budgeting techniques used by Canadian
has been an increase in the adoption of firms focuses on the three important
discounted capital budgeting techniques components-project evaluation, cash flow
estimation, and the cost of capital
estimation. The study too reveals the use of likely to use Net Present Value method.
DCF methods has become a norm in Small firms are less sophisticated when it
Canadian companies and that multiple comes to evaluating risky projects. Capital
evaluation criteria are generally employed. Asset Pricing Model (CAPM) was by far
Sensitivity analysis is also a popular the most popular method of estimating the
technique among quantitative methods used cost of equity capital. Still, a majority of the
in cash flow estimation, possibly reflecting companies uses a single company-wide
the popularity of PC-based spreadsheet discount rate to evaluate a new investment
programs. Amongst Canadian firms the project, even though different projects are
estimation of cost of capital also seems to likely to have different risk characteristics.
be based more often on judgment than on
any formal models. Majority of the firms HYPOTHESES OF THE STUDY
use non-standard discount rates, i.e., rates The following null hypotheses were framed
other than the WACC, and tend to rely on and tested:
judgmental or non-standard methods of Ho: The age of the company does not affect
estimating their cost of equity, the CAPM the selection of capital budgeting
or the dividend growth model being the techniques.
standard methods. The usage rate for DCF Ho1: The size of a company’s capital
methods is also found to be higher. budget does not affect the selection of
However, the use of judgmental and non- capital budgeting technique.
standard techniques in the estimation of Ho2: The education level of the financial
cash flows was also noteworthy. This may executives of these firms does not affect the
reflect the strategic nature of the capital selection of capital budgeting technique.
budgeting process. Ho3: The capital budgeting techniques
employed by these firms is independent of
In the year 2001 a survey was conducted by
their location.
John Graham and Campbell Harvey, Duke
University to identify how CFO’s make RESEARCH METHODOLOGY
capital budgeting and capital structure To identify corporate finance practices in
decisions. The survey provided clear Indian textile industries, a structured
evidence that firm size significantly affects questionnaire after pre-testing was served
the adoption of capital budgeting to collect data. The first step in any research
techniques—large companies were more is to decide upon the target population. The
target population for this study will be the  Direct Interviews

SMEs in the textile industry in India. The Direct interviews were administered on
majority of the textile industries in India are the financial executives of the sample
concentrated in the cities of Ludhiana firms in Ludhiana using the same
(Punjab), Coimbatore (Tamil Nadu) and structured questionnaire as mentioned
Surat (Gujarat). We have decided to divide above. Based on the willingness to
the target population based on these respond the sample size for Ludhiana
regions. All textile companies in these was restricted to twenty.
regions applying capital budgeting
techniques comprehend the universe of the  Telephonic Interviews
study. It was decided to take a sizeable Depending upon the availability of time
sample of firms from each region. This will and the willingness of the executives to
help in understanding the patterns of capital respond, telephonic interviews were
budget techniques region-wise. These firms administered on few sample firms of
will be operating in different product lines both Coimbatore and Surat regions.
such as hosiery, fabrics, yarn, apparels; etc.

 Mail Questionnaire
The structured questionnaire included An attachment file of the copy of
closed ended questions regarding use of questionnaire was also sent along with
discounted/non-discounted and risk covering letter to the Finance
adjusted techniques of capital budgeting, Manager/Director Finance of nearly 50
and the cost of capital on the Likert scale of companies so that one can download the
1 to 5. The respondents were also sent a questionnaire from the file attached.
cover file explaining briefly the concepts of

From these fifty mails sent twenty
capital budgeting so that they have a better
companies responded. It was intended to
understanding of the questions asked and
recipients that the individual responses
thus assisting them in responding. Refer to
would be kept strictly confidential and only
Annexure 1 for the cover file that was sent
aggregate generalization would be
along with the mail and Annexure 2 for the
published.
questionnaire that was administered to the
sample subjects. DATA AND DATA SOURCES
Sample Size: The total sample size for the
Three modes of data collection were
study was thus restricted to 60.
employed, namely:
Classification of Sample: The detailed The cumulative response for this question is
description of the sample characteristics is summarized in the following table: (Refer
discussed in Tables below: (Refer Table Table 6.1)
5.1 or 5.2).
The table above depicts that all the
In order to find the relation, whether there companies require formal capital
is any impact of education level of the budgeting. For 32 respondent companies
financial executives of these companies on (53.3%) the minimum cut off level of
the capital budgeting decisions taken by investment in a project required for formal
them, a question to determine the education capital budgeting analysis was less than
level of these executives was also included rupees 1 million while for 20 companies
in the questionnaire. Keeping the human (33.3%) it varied between 1-9 million.
psychology in to consideration, the option Eight companies mentioned rupees 10-29
of graduation and under graduation was million as minimum cut off investment
kept together to prevent any bias in the level in a project. No company considered
responses without hurting anybody’s greater than 30 million as minimum
feelings. (Refer Table 5.3 or 5.4) investment level for doing formal capital
budgeting analysis. Thus it is evident from
The different tables reveal classification of
above results that in the current era of
sample on the basis of different criteria. The
cutthroat competition, even for projects
data thus collected, was analyzed by
involving small investment outlays, the
applying mean, mode, summated scores
companies go in for adoption of formal
and Chi-square analysis. Chi-square test
capital budgeting analysis so as to avoid
was used to test various hypotheses which
any mistakes resulting in losses.
are indicative of the relationship between
two or more variables. Another question asked the respondent to
indicate about the usual purpose of the
RESULTS OF STUDY investment project taken up by their
In order to analyze at what level of companies. The purpose was to know
investment these sample companies whether these companies usually make
implement the capital budgeting decision to investment for expansion in to new
evaluate the projects to be undertaken, a business (diversification) or expansion of
question regarding the same was included existing business or just for modernization
in the questionnaire administered to them. purpose or the combination of any of the
above three. The cumulative response for Historical rate of return was reported by
this question is summarized in the eight companies while none of them
following table: (Refer Table 6.2) reported to use cost of retained earnings or
cost of new equity as their cost of capital.
The table above reveals that the dominant
motivation for making investment is the
In order to determine the most commonly
expansion of existing business. Expansion
used capital budgeting technique by these
of new business, equipment replacement
sample firms to evaluate their financial
and modernization are the other motivators
projects a relevant question was included in
for investment. The above results contradict
the questionnaire. The result obtained from
1
the results of some of the studies being
the responses is summarized in the table
done before.
below: (Refer Table 6.4)
The next step was to determine how these

The above table reveals that majority of the
sample companies compute their cost of
Finance executives of the respondent
capital to evaluate the project to be
companies considered Payback Period
undertaken. The summarized score for the
Method and NPV method (24 companies
same is computed in the following table:
each) as the most popular capital budgeting
(Refer Table 6.3)
techniques. Eight companies consider IRR
The companies have to decide appropriate and only four companies reported the use of
discount rate to provide financial ARR as popular capital budgeting
justification to the capital project. However techniques. Thus payback period and NPV
the consideration of risk and the need to are the three most popular capital budgeting
earn sufficient return on investment make techniques employed by these sample
the choice complicated. Therefore, the companies. The companies favored
choice of the best discount rate varied Payback Period Method because of its
substantially among the financial managers simplicity. The lack of willingness to adopt
of different companies. Table above the advanced discounted cash flow
indicates that twenty eight (46.7%) techniques, in certain small companies
respondent companies mentioned cost of explains the non-use of sophisticated
debt as the best discount rate followed by discounted flow methods.
the weighted average cost of capital
preferred by 24 companies (40%).
Respondents were then asked to rate the capital budgeting while Payback period is
factors on a scale of 1 to 5 in order that they being preferred as ‘always’ by 60 percent of
feel influence the decision of their selecting the selected companies and NPV ‘always’
a particular capital budgeting decision, by 53.3 percent of the companies. IRR
from most to least. Following table method is next preferred with 46.67 percent
summarizes the response: (Refer Table companies rating it as ‘often’. Among the
6.5) rest methods, Discounted Payback Period
and ARR were reported by one company
The table shows that 28 companies
each. Thus the results indicate that in the
regarded the experience and competency as
current era of globalization, majority of the
the most important factor for selecting
textile companies in India have shifted to
method of capital budgeting while 20
the use of discounted capital budgeting
companies reported importance of project
techniques. Among these modern methods
as most important factor that influence their
also, the highly sophisticated ones like NPV
capital budgeting decisions. Ease of
and IRR are preferred more than the less
understandability was the next important
sophisticated ones like Adjusted Present
factor ranked by another twenty companies
Value or Discounted Payback Period.
as the second most important factor.
Finance theory and informal rule of thumb In practice Payback period is thus preferred
were the least influencing factors in over NPV. These results are however not in
deciding the capital budgeting techniques conformity with the theory which considers
according to the sample companies. NPV as a superior method to others
Finally respondents were asked to rate that especially in situations where both give
how frequently they employ various capital contradictory results. Though, financial
budgeting methods. Respondents were management theory recommends NPV as
asked to rate on a five point Likert scale the best method and however, among the
ranging from ‘Never’ to ‘Always’. It is traditional ones Payback Period Method is
evident from the table below that still very popular with the companies.
companies employ multiple capital Majority of the companies make use of this
budgeting techniques. The result is method as a supplementary method along
summarized below: (Refer Table 6.6) with the sophisticated discounted
techniques because of its easy
The above table that Payback period and
understandability and simplicity.
NPV are the two most preferred methods of
ANALYSIS (TESTING HYPOTHESES) As evident from the table 7.2 the chi-square
In this section we will test the various values calculated are significant at 10%
hypotheses which were formulated earlier significance level. The critical value at this
in the course of this study. The results significance level and sixteen degrees of
indicated in the previous section will be freedom is 23.54. Thus we can say that for
used for the same. We made use of various ARR method the Pearson Chi-square test of
statistical techniques such as chi square independence was significant at 10% level.
testing, profile analysis using summated This indicates a significant relationship
score, median, mode et al. between the annual turnover of the
company and the ARR method. In other
This section shows the impact of different
words the use of ARR method increases
variables like size of capital budget, CEO
with increase in size of the company’s
education and age of company on the
turnover. In case of rest of the four methods,
choice of the capital budgeting technique
the Pearson Chi-square showed an
employed by the sample companies. (Refer
insignificant relationship. This indicates
Table 7.1)
that except for the ARR method, no
association was found between the size of
Table 7.1 shows the relationship between
annual turnover and the rest of the capital
age of the company and capital budgeting
budgeting methods (IRR, NPV, Payback
tools. The critical value at 10% significance
Period, discounted Payback Period). (Refer
level and eight degrees of freedom is 13.36.
Table 7.3)
Perusal of this table shows that at 10% level
of significance except in case of the NPV
and IRR methods, for all other methods of
education level of the financial executives
capital budgeting no significant association
of the sample companies and capital
was found between the methods and age.
budgeting tools. The critical value at 10%
This shows that only in case of NPV and
significance level and twelve degrees of
IRR, Chi Square is significant revealing
freedom is 18.54. Perusal of this table
association between the method and age of
shows that at 10% level of significance
the company. It was observed that older the
there exists no significant relationship
company more is its preference for these
between the above defined two variables.
methods while the younger companies are
This implies that the use of any particular
making lesser use of these methods. (Refer
capital budgeting technique is independent
Table 7.2)
of the education level of the financial The study reveals that with so many recent
executives of the company. That is even the happenings in the world economy, these
executives with higher level education companies are paying increasingly greater
prefer Payback and NPV for evaluating the emphasis on making sound investment
projects. (Refer Table 7.4) decisions. Even for projects involving small
investment outlays, majority of the
companies go in for adoption of formal
location of the sample companies and
capital budgeting analysis so as to avoid
capital budgeting tools. The critical value at
any mistakes resulting in losses. This result
10% significance level and eight degrees of
is similar to the result of the study
freedom is 13.36. Perusal of this table
conducted by Verma, Gupta and Batra.
shows that at 10% level of significance
Among the commonly used capital
there exists no significant relationship
budgeting techniques, the most commonly
between the above defined two variables.
used are NPV and Payback Period. While
This implies that the use of any particular
this result is almost similar to the results for
capital budgeting technique is independent
Indian industries, as reported by Verma,
of the location of the companies.
Gupta and Batra, on the other hand Jog and
Srivastava report the greater use of DCF
CONCLUSION AND COMPARISON
techniques in Canada.
OF RESULTS
To gain perspective on the status of capital The result of this study reveals that majority
budgeting practices in textile industry and of these companies use cost of debt as their
cost of capital estimation and to make some cost of capital for evaluating their projects
definitive conclusions, we compared our which is not in tandem with the use of
results with those reported in the Indian WACC followed in most of the industries
manufacturing industry and that of other as reported in above mentioned reports.
countries like Canada. For the purpose we
Various foreign and Indian studies on
referred to the two studies conducted in the
capital budgeting have revealed that the
field viz; A Survey of Capital Budgeting
size of firm significantly affects the practice
Practices in Corporate India by Verma,
of corporate finance. For example, majority
Gupta and Batra and another study titled
of the studies reveal that large companies
Capital Budgeting Practices in Corporate
were much more likely to use Net Present
Canada by Jog and Srivastava.
Value technique, while small firms tend to
rely on the payback criterion. Our study is  Pandey. I.M., 1989, “Capital Budgeting
also consistent with these previous studies. Practices of Indian Companies,” MDI
Management Journal, 2.1, pp. 1-15.
This can also be concluded from the study
 Porwal. L. S., 1976, Capital Budgeting
that majority of the financial projects are
in India, Sultan Chand and Sons, New
taken up by these companies for the
Delhi.
expansion in the existing business line only.
 Vijay. J. and Srivastava. A. K., 1995,
Finally the analysis carried out in this study
“Capital Budgeting Practices in
reveals that there exists no significant
Corporate Canada,” Financial Practices
relationship between the capital budgeting
and Education, 5.3, pp. 387-97.
techniques employed by these companies
 Trahan. E. A., and Gitman. L. J., 1995,
and their location.
“Bridging the Theory Practice Gap in
REFERENCES Corporate Finance: A Survey of Chief

Financial Officers,” Quarterly Review
 Anand. M., 2002, “Corporate Finance
of Economics and Finance, 35, pp. 73-
Practices in India: A Survey,” Vikalpa,
87
2.4, pp. 29-51.
 Prabhakara. B. C. and Sharma. A., ANNEXURE 1
1995, “Capital Budgeting Practices in INFORMATION BROCHURE
Indian Industry–An Empirical Study,” Defined herewith are few concepts related
ASCI Journal of Management, 25.1, pp. to capital budgeting which will help you in
34-43. answering some questions given in the
 Drury. C., Braund. S. and Tayles. M., questionnaire.
(1993), “A Survey of Management
CAPITAL BUDGETING THE
Accounting Practices in UK
CONCEPT
Manufacturing Companies,” ACCA
Capital budgeting is the technique of
Research Paper, 32, Chartered
making long-term planning decisions for
Association of Certified Accountants.
investment and their finance. Decisions on
 Jain. P.K. and Kumar. M., (1998),
capital expenditure are difficult as future is
“Comparative Capital Budgeting
uncertain. It includes current cash outlay or
Practices: The Indian Context,”
a series of cash outlays in return for an
Management and Change, (January-
anticipated flow of future benefits. Capital
June), pp. 151-171
budgeting is employed to evaluate long-
term expenditure decisions which involve the specified PBP maximum is however
current outlays and the benefits that occur rejected because it will take too long a time
in the future years. to retrieve initial capital.
OBJECTIVES OF CAPITAL ACCOUNTING RATE OF RETURN

BUDGETING (ARR)
 To help select projects that assist in The accounting rate of return is described
maximizing the market value of the as the annual accounting profits from a
firm while rejecting projects which do capital project divided by a defined annual
not assist in maximizing value. Only by average capital investment outlay over a
seeking and accepting projects that project’s life span. The rule is thus
return an incremental amount above the compared by the firm to certain arbitrarily
opportunity cost of capital will the firm set hurdle rate. It means, is simply the
be adding to its value? average after tax profit divided by the initial
 To estimate the total change in the cash outlay of the project, and has similarity
firm's cash flows that results because a with the return on assets.
project is undertaken. Hence indirect
NET PRESENT VALUE (NPV)
effects on the costs and/or revenues
The net present value of an investment or
associated with a firm's other projects
capital project is the aggregation of the
that occur as a result of the acceptance
present values of all cash benefits by
of a new project should be considered
deducting the present value of all cash. In
when evaluating the cash flows from a
mathematical form the net present value is
new project.
explained as:
PAYBACK PERIOD METHOD (PBP)

It depends on the number of period (usually
in years) taken for the future net cash flows
on a capital investment to payback the Where CFt = Cash flow at the end of the
initial or original net cash outlay. Since it is period t R is the required return per period.
based on an immediate retrieval of gain N = overall number of periods in the
from the executed project, formulation of project’s life.
this decision will consider specifically I0 = the initial fund project required. The
payback period. Any project with PB above net present value is thus the evaluation of
the amount by which the project value is technique at the disposal of an

maximized; this will in turn serve as gain entrepreneurs or decision makers to assist
for the wealth the owners used in future to in choosing among several causes of
come. A negative net present value means actions. In a layman language, if is the
the project is not desirable and vice versa. monetary cost of a project is ascertained
Every estimation of NPV of a project and is also compared with its expected
should involve measuring the project’s benefits in monetary terms. For a project to
future net cash flows, discounting these at be acceptable, its benefits must outweigh its
the appropriate cost of capital to procure costs.
their present value, deducting the initial
capital cost or net investment outlay, at the ANNEXURE 2
project commencement period. Dear Recipient,
We are highly obliged that you have taken
INTERNAL RATE OF RETURN (IRR) some moments out of your precious time to
It is described as the rate of interest at which provide your invaluable responses.
the present value of expected capital Through your responses you will help us in
investment outlays is exactly equivalent to analyzing the capital budgeting practices in
the present value of expected cash earnings the textile industries in India, and thus
on that capital project. It is in essence the making our project a success. You are
rate, which equates the present value of the provided with a cover file for reference that
cash inflows, and also a rate making the will facilitate you in responding to the
computed net present value exactly zero. questionnaire. You are requested to kindly
Separately put, it is the rate of return on go through the instructions carefully and
invested capital, which the project is respond to the questions.
returning to the firm, when the net present The individual information provided by you
value is equal to zero. will be kept strictly confidential and will
not be revealed in any case and any form
PROFITABILITY INDEX (PI) without your consent. Only the aggregate
The Profitability Index (PI) also known as results will be displayed in the report we
the “Benefits-Cost Ratio” is the ratio of the will be publishing as a part of our course of
present value of future cash benefits, at the Financial Management.
required rate of return to the initial cash
outlay of the investment. It is another
We are grateful to you for your highly

cooperative efforts.
Regards,
Saurabh Sharma
INSTRUCTIONS
1. Provided below on the next page are a
series of questions regarding the use of
capital budgeting techniques in your
firm.
2. You are requested to kindly read the
information brochure sent to you along
with this questionnaire (Please find
Brochure.pdf attached along with the
mail). The information provided in the
brochure will help you a lot in
answering some questions in this
questionnaire.
3. You are requested to answer all the
questions provided in the questionnaire.
4. Multiple choice questions are provided
in the questionnaire with a scale to
answer. You are required to select a
value from the scale that you feel best
describes your opinion.
5. Wherever required additional
instructions are provided to answer the
subsequent question.

………………………………………………………………………………………………………
QUESTIONNAIRE
1. Please specify the annual turnover (approx. in INR) of your company for the year 2016-
2017.
a. <10 million
b. 10-99 million
c. 100-499 million
d. 500-999 million
e. > 1 Billion
2. Kindly specify the product line of your firm (select multiple if applicable).
a. Hosiery
b. Spinning
c. Yarn
d. Fabric
e. Apparel
f. Others (please specify) : _______________
3. Kindly specify the year of inception of your company. _______________
4. As described in the information brochure about the capital budgeting practices, for what
minimum level of investment (in INR) do you decide to employ those techniques?
a. Less than 1 million
b. 1-9 million
c. 10-29 million
d. 30-59 million
e. Greater than 60 million
5. Please specify the usual purpose of your investment.

i. Expansion into new business/Diversification
ii. Expansion of existing business
iii. Equipment replacement and modernization
a. Only i
b. Only ii
c. Only iii
d. Only i & ii
e. Only ii & iii
f. Only i & iii
g. All three (i,ii,iii)
6. How do you compute the relevant discount rate for the project to be undertaken?
a. Weighted average Cost of Capital (WACC)
b. Cost of debt
c. Cost of retained earning
d. Cost of new equity

e. Arbitrary rate
f. Historical Rate of Return
7. Which capital budgeting technique do you most frequently use to evaluate the projects
to be undertaken?
a. NPV
b. IRR
c. Payback Period
d. Discounted Payback Period
e. Profitability Index
f. ARR
8. Please rank the following factors on the basis of their degree of influence on the capital
budgeting techniques employed in your company. Please rank from 1 to 6, where 1
represents higher rank than 6.
FACTORS RANK
Finance Theory
Experience and Competency
Informal Rule of Thumb
Importance of the Project
Easy Understandability
Top Management Familiarity
9. Please specify how often do you use the following capital budgeting method?
Often Always
Never (1) Rarely (2) Sometimes (3) (4) (5)
NPV
IRR
Payback Period
Discounted Payback Period
Profitability index
ARR
10. We will be analyzing the impact of educational level of top management of these firms
on their capital budgeting practices. You are requested to please specify your
educational level.
a. Undergraduate/Graduate
b. MBA
c. Non MBA Masters
d. Doctorate
LIST OF TABLES
Table 5.1: Classification of Sampled Companies on Basis of Annual Turnover
Annual Turnover Percentage of

(In Rs.) No. of Companies Companies
< 10 Million 14 23.3
10-99 Million 16 26.7
100-499 Million 12 20.0
500-999 Million 12 20.0
> 1 Billion 6 10.0
Total 60 100.0
Table 5.2: Age wise classification of Sampled Companies

Age of the Company
(In Years) No. of Companies Percentage of Companies
5-19 Years 16 26.7
20-39 Years 12 20.0
> 39 Years 32 53.3
Total 60 100.0
Table 5.3: Educational Status of Financial Executives

Percentage of
Educational Level
No. of Companies Companies
Undergraduate/Graduate 24 40.0
MBA 16 26.7
Non MBA Masters 16 26.7
Doctorate 4 6.7
Total 60 100.0
Table 5.4: Product line of sampled companies

Percentage of
Product Line
No. of Companies Companies
Fabric 8 13.3
Fabric, Bed Lenin 4 6.7
Hosiery 4 6.7
Hosiery, Apparel 8 13.3
Hosiery, Spinning, Yarn, Fabric 4 6.7
Hosiery, Spinning, Yarn, Fabric, Apparel 4 6.7
Hosiery, Yarn, Fabric, Apparel 4 6.7
Yarn 8 13.3
Yarn, Fabric 12 20.0
Yarn, Fabric, Apparel 4 6.7
Total 60 100.0
Table 6.1: Level of investment required for capital budgeting decision

Min Level of
Investment (In Rs.) No. of Companies Percentage of Companies
< 1 Million 32 53.3
1-9 Million 40 33.3
10-29 Million 8 13.3
30-59 Million 0 0
>60 Million 0 0
Total 60 100.0
Table 6.2: Purpose of Investment Formal Capital Budgeting Analysis

No. of Percentage of
Purpose of Investment
Companies Companies
Expansion into new business/diversification only (i) 0 0
Expansion of existing business only (ii) 24 40.0
Equipment replacement and modernization only (iii) 4 6.7
Expansion into new and existing business (i) + (ii) 4 6.7
Expansion of existing business and equipment replacement 16 26.7
(ii) + (iii)
Expansion into new business and equipment replacement (i) 0 .0
+ (iii)
Expansion into new business, existing business and 12 20.0
equipment replacement (i) +(ii) + (iii)
Total 60 100.0
Table 6.3: Method of computation of cost of capital
Percentage of
Discount Rate No. of Companies
Companies
Weighted Average Cost of Capital (WACC) 24 40.0
Cost of Debt 28 46.7
Cost of Retained Earning 0 .0
Cost of New Equity 0 .0
Arbitrary Rate 0 .0
Historical Rate of Return 8 13.3
Total 60 100.0
Table 6.4: Most commonly used Capital budgeting technique

Capital Budgeting
Technique No. of Companies Percentage of Companies
Payback Period 24 40.0
Discounted Payback 0 .0
NPV 24 40.0
IRR 8 13.3
ARR 4 6.7
Total 60 100.0
Table 6.5: Factors affecting the capital budgeting techniques

RANKS
FACTORS Summated
1 2 3 4 5
Score
46.67
Finance Theory 13.3 (8) 20 (12) 13.3 (8) 6.67 (4) 47
(28)
Experience and 46.67 13.33 33.33
6.67 (4) 0 (0) 30
Competency (28) (8) (20)
Informal Rule of Thumb 0 (0) 0 (0) 0 (0) 6.67 (4) 33.33 (20) 74
33.33 33.33 26.67
Importance of the Project 6.67 (4) 0 (0) 31
(20) (20) (16)
33.33 26.67 33.33
Easy Understandability 6.67 (4) 0 (0) 43
(20) (16) (20)
Note: *Figures in bracket represent the number of companies
Table 6.6: Capital Budgeting Techniques Preferred By

Companies
Capital Budgeting Percentage of Companies
Mode
Method Never [1] Rarely [2] Sometimes [3] Often [4] Always [5]
NPV 20 (12) 6.67 (4) 6.67 (4) 13.33 (82) 53.33 (32) 5
IRR 6.67 (4) 0 (0) 13.33 (8) 46.67 (28) 13.33 (8) 4
Payback Period 13.33 (8) 0 (0) 6.67 (4) 20 (12) 60 (36) 5
Discounted Payback
46.67 (28) 6.67 (4) 26.67 (16) 6.67 (4) 13.33 (8) 1
Period
ARR 33.33 (20) 20 (12) 20 (12) 13.33 (8) 13.33 (8) 1
Note: *Figures in bracket represent the number of companies
Table 7.1: Relationship between Age of companies and Capital Budgeting Techniques
Capital Frequency of Usage (NPV)
Budgeting
Age of
Tool
the
(Chi
Company
Square
Value) Never Rarely Sometimes Often Always Total
NPV* 5-19 Count 8 0 0 8 0 16
(13.854) Years % of 13.3% .0% .0% 13.3% .0% 26.7%
Total
20-39 Count 4 0 0 0 8 12
Years % of 6.7% .0% .0% .0% 13.3% 20.0%
Total
> 39 Count 0 4 4 0 24 32
Years % of .0% 6.7% 6.7% .0% 40.0% 53.3%
Total
Total Count 12 4 4 8 32 60
% of 20.0% 6.7% 6.7% 13.3% 53.3% 100.0%
Total
IRR* 5-19 Count 0 0 8 8 0 16
(14.286) Years % of .0% .0% 13.3% 13.3% .0% 26.7%
Total
20-39 Count 4 0 0 8 0 12
Years % of 6.7% .0% .0% 13.3% .0% 20.0%
Total
> 39 Count 0 0 0 12 20 32
Years % of .0% .0% .0% 20.0% 33.3% 53.3%
Total
Total Count 4 0 8 28 20 60
% of 6.7% .0% 13.3% 46.7% 33.3% 100.0%
Total
Count 0 0 0 0 16 16
5-19 % of .0% .0% .0% .0% 26.7% 26.7%

Years Total
20-39 Count 0 0 0 0 12 12
Years % of .0% .0% .0% .0% 20.0% 20.0%
Payback Total
Period > 39 Count 8 0 4 12 8 32
(8.750) Years % of 13.3% .0% 6.7% 20.0% 13.3% 53.3%
Total
Count 8 0 4 12 36 60
Total % of 13.3% .0% 6.7% 20.0% 60.0% 100.0%
Total
Discounted 5-19 Count 12 0 4 0 0 16
Payback Years % of 20.0% .0% 6.7% .0% .0% 26.7%
Period Total
(7.634) 20-39 Count 4 0 4 4 0 12
Years % of 6.7% .0% 6.7% 6.7% .0% 20.0%
Total
> 39 Count 12 4 8 0 8 32
Years % of 20.0% 6.7% 13.3% .0% 13.3% 53.3%
Total
Total Count 28 4 16 4 8 60
% of 46.7% 6.7% 26.7% 6.7% 13.3% 100.0%
Total
ARR 5-19 Count 0 4 4 8 0 16
(10.812) Years % of .0% 6.7% 6.7% 13.3% .0% 26.7%
Total
20-39 Count 8 0 0 0 4 12
Years % of 13.3% .0% .0% .0% 6.7% 20.0%
Total
> 39 Count 12 8 8 0 4 32
Years % of 20.0% 13.3% 13.3% .0% 6.7% 53.3%
Total
Total Count 20 12 12 8 8 60
% of 33.3% 20.0% 20.0% 13.3% 13.3% 100.0%
Total
*Figures in bracket represent chi-square values.
*Chi Square significant at 10% level of significance
Table 7.2: Relationship between Annual Turnover of companies and Capital Budgeting
Techniques
Budgeting
Tool Annual
(Chi Turnover
Square
NPV < 10 Count 4 0 0 0 0 4
(17.656) Million % of 6.7% .0% .0% .0% .0% 6.7%
Total
10-99 Count 8 0 0 4 4 16
Million % of 13.3% .0% .0% 6.7% 6.7% 26.7%
Total
100-499 Count 0 4 0 4 4 12
Million % of .0% 6.7% .0% 6.7% 6.7% 20.0%
Total
500-999 Count 0 0 0 0 4 4
Million % of .0% .0% .0% .0% 6.7% 6.7%
Total
> 1 Count 0 0 4 0 20 24
Billion % of .0% .0% 6.7% .0% 33.3% 40.0%
Total
Total Count 12 4 4 8 32 60
% of 20.0% 6.7% 6.7% 13.3% 53.3% 100.0%
Total
IRR < 10 Count 0 0 4 0 0 4
(16.554) Million % of .0% .0% 6.7% .0% .0% 6.7%
Total
10-99 Count 4 0 4 4 4 16
Million % of 6.7% .0% 6.7% 6.7% 6.7% 26.7%
Total
100-499 Count 0 0 0 4 8 12
Million % of .0% .0% .0% 6.7% 13.3% 20.0%
Total
500-999 Count 0 0 0 0 4 4
Million % of .0% .0% .0% .0% 6.7% 6.7%
Total
> 1 Count 0 0 0 20 4 24
Billion % of .0% .0% .0% 33.3% 6.7% 40.0%
Total
Total Count 4 0 8 28 20 60
% of 6.7% .0% 13.3% 46.7% 33.3% 100.0%
Total
Payback < 10 Count 0 0 0 0 4 4
Period Million % of .0% .0% .0% .0% 6.7% 6.7%
(14.792) Total
10-99 Count 4 0 0 0 12 16
Million % of 6.7% .0% .0% .0% 20.0% 26.7%
Total
100-499 Count 0 0 0 8 4 12
Million % of .0% .0% .0% 13.3% 6.7% 20.0%
Total
500-999 Count 4 0 0 0 0 4
Million % of 6.7% .0% .0% .0% .0% 6.7%
Total
> 1 Count 0 0 4 4 16 24
Billion % of .0% .0% 6.7% 6.7% 26.7% 40.0%
Total
Total Count 8 0 4 12 36 60
% of 13.3% .0% 6.7% 20.0% 60.0% 100.0%
Total
Discounted < 10 Count 4 0 0 0 0 4
Payback Million % of 6.7% .0% .0% .0% .0% 6.7%
Period Total
(8.259) 10-99 Count 8 0 4 4 0 16
Million % of 13.3% .0% 6.7% 6.7% .0% 26.7%
Total
100-499 Count 4 0 4 0 4 12
Million % of 6.7% .0% 6.7% .0% 6.7% 20.0%
Total
500-999 Count 4 0 0 0 0 4
Million % of 6.7% .0% .0% .0% .0% 6.7%
Total
> 1 Count 8 4 8 0 4 24
Billion % of 13.3% 6.7% 13.3% .0% 6.7% 40.0%
Total
Total Count 28 4 16 4 8 60
% of 46.7% 6.7% 26.7% 6.7% 13.3% 100.0%
Total
< 10 Count 0 0 0 4 0 4
Million % of .0% .0% .0% 6.7% .0% 6.7%
Total
10-99 Count 0 4 4 4 4 16
Million % of .0% 6.7% 6.7% 6.7% 6.7% 26.7%
Total
ARR*
100-499 Count 0 4 8 0 0 12
(25.833)
Million % of .0% 6.7% 13.3% .0% .0% 20.0%
Total
500-999 Count 0 4 0 0 0 4
Million % of .0% 6.7% .0% .0% .0% 6.7%
Total
Count 20 0 0 0 4 24
> 1 % of 33.3% .0% .0% .0% 6.7% 40.0%

Billion Total
Total Count 20 12 12 8 8 60
% of 33.3% 20.0% 20.0% 13.3% 13.3% 100.0%
Total
Table 7.3: Relationship between Education level of financial executives and Capital
Budgeting Techniques
Budgeting
Tool
Educational Level
(Chi
Square
NPV* Undergraduate/Graduate Count 4 0 0 4 16 24
(18.958) % of 6.7% .0% .0% 6.7% 26.7% 40.0%
Total
MBA Count 4 4 0 0 8 16
% of 6.7% 6.7% .0% .0% 13.3% 26.7%
Total
Non MBA Masters Count 4 0 0 4 8 16
% of 6.7% .0% .0% 6.7% 13.3% 26.7%
Total
Doctorate Count 0 0 4 0 0 4
% of .0% .0% 6.7% .0% .0% 6.7%
Total
Total Count 12 4 4 8 32 60
% of 20.0% 6.7% 6.7% 13.3% 53.3% 100.0%
Total
IRR Undergraduate/Graduate Count 0 0 4 8 12 24
(5.732) % of .0% .0% 6.7% 13.3% 20.0% 40.0%
Total
MBA Count 4 0 0 8 4 16
% of 6.7% .0% .0% 13.3% 6.7% 26.7%
Total
% of .0% .0% 6.7% 13.3% 6.7% 26.7%
Total
% of .0% .0% .0% 6.7% .0% 6.7%
Total
Total Count 4 0 8 28 20 60
% of 6.7% .0% 13.3% 46.7% 33.3% 100.0%

Total
Payback Undergraduate/Graduate Count 4 0 0 8 12 24
Period % of 6.7% .0% .0% 13.3% 20.0% 40.0%
(17.708) Total
MBA Count 0 0 0 4 12 16
% of .0% .0% .0% 6.7% 20.0% 26.7%
Total
% of 6.7% .0% .0% .0% 20.0% 26.7%
Total
% of .0% .0% 6.7% .0% .0% 6.7%
Total
Total Count 8 0 4 12 36 60
% of 13.3% .0% 6.7% 20.0% 60.0% 100.0%
Total
Discounted Undergraduate/Graduate Count 16 0 8 0 0 24
Payback % of 26.7% .0% 13.3% .0% .0% 40.0%
Period Total
(16.786) MBA Count 0 4 4 4 4 16
% of .0% 6.7% 6.7% 6.7% 6.7% 26.7%
Total
% of 20.0% .0% 6.7% .0% .0% 26.7%
Total
% of .0% .0% .0% .0% 6.7% 6.7%
Total
Total Count 28 4 16 4 8 60
% of 46.7% 6.7% 26.7% 6.7% 13.3% 100.0%
Total
ARR Undergraduate/Graduate Count 8 8 4 4 0 24
(11.167) % of 13.3% 13.3% 6.7% 6.7% .0% 40.0%
Total
MBA Count 8 0 4 0 4 16
% of 13.3% .0% 6.7% .0% 6.7% 26.7%
Total
% of 6.7% 6.7% 6.7% 6.7% .0% 26.7%
Total
% of .0% .0% .0% .0% 6.7% 6.7%
Total
Total Count 20 12 12 8 8 60
% of 33.3% 20.0% 20.0% 13.3% 13.3% 100.0%
Total
Table 7.4: Relationship between location of the companies and Capital Budgeting
Techniques
Budgeting
Tool
Location
(Chi
Square
NPV Coimbatore Count 1 1 0 1 2 5
(5.250) % of
6.70% 6.70% 0.00% 6.70% 13.30% 33.30%
Total
Ludhiana Count 1 0 1 0 3 5
% of
6.70% 0.00% 6.70% 0.00% 20.00% 33.30%
Total
Surat Count 1 0 0 1 3 5
% of
6.70% 0.00% 0.00% 6.70% 20.00% 33.30%
Total
Total Count 3 1 1 2 8 15
% of
20.00% 6.70% 6.70% 13.30% 53.30% 100.00%
Total
IRR Coimbatore Count 0 0 1 2 2 5
(3.686) % of .0% .0% 6.7% 13.3% 13.3% 33.3%
Total
% of .0% .0% 6.7% 13.3% 13.3% 33.3%
Total
% of 6.7% .0% .0% 20.0% 6.7% 33.3%
Total
% of 6.7% .0% 13.3% 46.7% 33.3% 100.0%
Total
Payback Coimbatore Count 0 0 0 2 3 5
Period % of .0% .0% .0% 13.3% 20.0% 33.3%
(8.667) Total
% of 13.3% .0% 6.7% .0% 13.3% 33.3%
Total
% of .0% .0% .0% 6.7% 26.7% 33.3%
Total
% of 13.3% .0% 6.7% 20.0% 60.0% 100.0%
Total
Discounted Coimbatore Count 1 1 2 0 1 5
Payback % of 6.7% 6.7% 13.3% .0% 6.7% 33.3%
Period Total
(9.000) Ludhiana Count 4 0 0 0 1 5
% of 26.7% .0% .0% .0% 6.7% 33.3%
Total
% of 13.3% .0% 13.3% 6.7% .0% 33.3%
Total
% of 46.7% 6.7% 26.7% 6.7% 13.3% 100.0%
Total
ARR Coimbatore Count 2 0 2 1 0 5
(10.812) % of 13.3% .0% 13.3% 6.7% .0% 33.3%
Total
% of 6.7% 6.7% 6.7% 6.7% 6.7% 33.3%
Total
% of 13.3% 13.3% .0% .0% 6.7% 33.3%
Total
% of 33.3% 20.0% 20.0% 13.3% 13.3% 100.0%
Total

Analysis of Capital Budgeting Practices in Textile Industry in India

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ELK ASIA PACIFIC JOURNAL OF FINANCE AND RISK MANAGEMENT

SSN 2349-2325 (Online); DOI: 10.16962/EAPJFRM/issn. 2349-2325/2015; Volume 8 Issue 3 (2017)