Capital Budgeting in Nepal and the US

Abstract

Capital budgeting is one of the most significant topics in corporate finance. Companies use capital budgeting to make investment decisions that add to the firm’s value. It is important that they make the right investments to define strategic direction and sustain both product market and capital market flexibility. Hence it is imperative that they use the right capital budgeting technique (“CBT”). CBTs have evolved over time and most companies in the US now use techniques that coincide with the recommendations of the literature, mainly discounted cash flow techniques (“DCF”). Although DCF techniques might be considered the preferred approach in principle, we will see that it is not always so in practice. In this article we study CBTs used in Nepal and find that they differ from the preferred approaches.