The Impact of Using Capital Budgeting techniques on profitability of firms: survey of manufacturing firms in Pakistan

Abstract

Purpose: The main purpose is to identify the relationship between capital budgeting techniques on firm’s profitability in terms of return on asset and net profit margin, considering the manufacturing firms of Pakistan. In addition, to highlight the comparison in terms of profitability for the usage of sophisticated and unsophisticated capital budgeting techniques. Design/methodology/approach: Primary and Secondary data is analyzed using descriptive statistics, frequencies and regression model. Analysis is done for comparison of profitable, sophisticate firms with non-profitable, unsophisticated manufacturing firms. Findings: The use of sophisticated capital budgeting techniques by large fraction of manufacturing firms in Pakistan has a positive relation with the profitability of the firms. Practical implications: With the increase in usage of techniques that follow discounted cash flow model, it is required by the managers to evaluate the possibility of effectively measuring the investment projects since they affect the organization in short as well as long-term basis. Keywords: Capital Budgeting, Sophistication, manufacturing firms, ROA