Techniques for Investment Decision Making: An Analysis of Firms in Pakistan

Abstract

Aim of the Study: This study aimed to investigate the capital budgeting decision-making techniques employed by firms in Pakistan, with a focus on the practices of the country’s largest companies. The research sought to identify the methods most commonly used by firms and explore the adoption of advanced financial techniques in the capital budgeting process.

Methodology: A postal survey and cross-sectional data gathered from fifty-three sizable businesses in Pakistan served as the foundation for the study. It provided detailed information on the firms' capital budgeting practices, especially the use of discounted cash flow methods and other investment appraisal techniques..

Findings: According to the empirical results, Pakistan is gradually moving toward more advanced financial practices, as seen by the growing use of Discounted Cash Flow (DCF) approaches. Businesses frequently used Net Present Worth (NPW) and Internal Rate of Return (IRR), and many also used risk-adjusted cash flow techniques in their assessments. Only a small percentage of businesses, nevertheless, made use of sophisticated risk assessment instruments like Real Options Theory and the Modified Internal Rate of Return (MIRR). Compared to more developed nations, Pakistan continued to embrace DCF methodologies at a far lesser rate.

Conclusion: The study concluded that while there has been some alignment with global trends in financial decision-making, many firms in Pakistan still fall short of meeting fundamental requirements in their capital budgeting practices. The study suggested that firms should enhance their use of advanced methodologies, address gaps in financial expertise, and adopt more comprehensive technological tools to improve their capital budgeting processes. Further research was recommended to explore the challenges in greater depth.