The purpose of this paper is to understand current practices in capital budgeting (including real options) in Indian companies and provide a normative framework (guidelines) for practitioners (based on our findings and literature reviewed).
A questionnaire survey was administered to 166 non‐financial companies of the BSE 200 index. Secondary data were also collated from 2001‐2011.
Trends towards sophisticated techniques and sound capital budgeting decisions have continued in India. All sample respondent firms used discounted cash flow (DCF) techniques in conjunction with non‐DCF techniques. Internal rate of return (IRR), used by more than three quarters of the sample companies, is favored over net present value (NPV), used by half of the sample companies. Real options are used by half of the sample companies. Permanent (long‐term) capital has been used to finance fixed assets (net) and working capital (net).
The limitations of the study are that it is country specific and a detailed sectoral analysis of the constituent sectors of the sample companies could have perhaps provided deeper insight into the subject.
The findings of this research, decades of teaching experience of the authors and the literature reviewed have been utilized to evaluate current practices and suggest possible improvements in decision making (through a normative framework).
The findings show that there still remains a theory‐practice gap in the usage of IRR over NPV. The usage of permanent (long‐term) capital to fund fixed assets (net) and permanent working capital requirements, although sound, could be an indication of surplus funds which could be used to repay long‐term debt or finance more asset building.
