A survey of capital budgeting techniques used by listed mining companies in South Africa

Abstract

Capital budgeting is crucial in the maximisation of shareholder value as it depends on the capital \nbudgeting decisions made by the managers. The capital budgeting techniques used by South African \nmines listed on the Johannesburg Securities Exchange (JSE) and the reasons behind their use were \ninvestigated. Questionnaires were conducted during the period of March to May 2011 to gather data. \nThe results also indicated that the net present value (NPV) (69%), the internal rate of return (IRR) (46%) \nand the payback period (PB) (23%) are the most common techniques used to evaluate major projects. \nThe main reason for the use of the NPV was its superiority as it accurately takes into account the time \nvalue of money. The IRR method is used owing to its ability to rank projects and to indicate the actual \nreturn of each project, thereby informing managers whether an investment will increase the company’s \nvalue. The results indicated that the continual use of PB was based on the simplicity of the technique. \nFinancial officers (FOs) should also make use of other techniques for example, discounted payback \nperiod (DPB), profitability index (PI) and the real options which are of valuable in determining the \nfeasibility of projects.

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