The capital budgeting methods of a Finnish Construction Company – how to build profitably?
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School of Business |
Bachelor's thesis
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Date
2022
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Mcode
Degree programme
Laskentatoimi
Language
en
Pages
20 + 2
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Abstract
The capital budgeting practices have been studied extensively, but the field has been dominated by survey research methods. To help deepen knowledge and enrich observation and interpretation of contextual practice, more case studies in this field are needed. (Northcott, 1991). This paper aims to provide a little addition to the empirical evidence of capital budgeting by viewing a single case company. Construction industry is selected because construction projects shape the living environment of every one of us and the industry plays a substantial role in the economy – these things make the investment decisions made by construction companies very important. Empirical evidence about capital budgeting methods is gathered from a Finnish construction company through two interviews to find out how projects are evaluated. The results of the empirical research are compared to the view formed in the literature review to find any inconsistencies between theory and practice. Capital budgeting theory promotes the use of sophisticated methods such as net present value and real options analysis, but the findings of this study do not exactly support this. It is discovered that IRR is seen as the number one capital budgeting method in the case company. Company specific measures are also reportedly used. Real options are not calculated but are still considered by decision-makers, which strengthens the previous research’s findings. The discount rate is mostly determined using WACC, which is in line with theory. Interestingly, the discount rate is found to be geographical-area-specific, although project-specific discount rates are determined for some projects. The capital budgeting process has developed towards discounted cash flow methods in the case company, as is suggested by theory.Description
Thesis advisor
Vaivio, JuhaniKeywords
capital budgeting methods, project evaluation, real options, Finnish construction company