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Case Studies | Financial Engineering | Kenya | Volume 4 Issue 5, May 2015

The Effects of Capital Budgeting Techniques on The Growth of Micro-Finance Enterprises in Mombasa

Stephen O. Menya | Lucy Gichinga

Abstract: Capital budgeting is the process through which firms decide which long-term investments are expected to generate cash flows over several years. The decision to accept or reject a capital budgeting decision depends on an analysis of cash flows generated by the project and it-s costs. The decision rules in capital budgeting decision are Payback Period, Net Present Values, Internal Rates of Returns, Accounting Rates of Returns and Profitability Index. A capital budgeting decision rule must consider all of the project-s cash flows, must consider time value of money and must always lead to the correct decision when choosing among mutually exclusive projects. Capital budgeting projects are classified as either Independent project or mutually exclusive projects. An Independent project is a project whose cash flows are not affected by the accept/reject decision for other projects. Thus all Independent projects meeting the capital budgeting criterion should be accepted. Mutually exclusive projects are a set of from which at most one will be accepted. The main objective of this research is to determine the effect of capital budgeting on the growth of MFIs in Mombasa County. The specific objectives of this research are assessing the extent to which Internal Rate of Returns assist in the investment appraisal of MFIs in Mombasa County, establishing the factors influencing the usage of NPV by MFIs in Mombasa County, to assess the extent to which Payback Period rule affects the growth of MFIs in Mombasa County and to find out the challenges that MFIs in Mombasa County face in the implementation of Capital Budgeting Decisions. The study research design employed was a census method. This is a method of collecting information that represents the views of the whole community and group. There was collection of quantitative data which was analyzed using descriptive statistics. The study population consisted of all MFIs operating within Mombasa County. There are 16 Micro finance Enterprises in Mombasa County as per data from Association of Micro finance Institutions of Kenya website. The data was collected from all these Micro-finance enterprises with one of them being used as a pilot test. Thus data was officially utilized essentially from 15 Micro-finance Enterprises as the sixteenth one was a pilot test. The data collected was analyzed using descriptive statistics and regression, presented in tables and charts extracted from both MS Excel and Statistical Package for Social Studies (SPSS) software tools. The data collected was presented in tables and charts extracted from both Ms excel and Statistical Package for Social Studies (SPSS) software tools version 20. The general findings of the research were that the capital budgeting techniques do indeed play an essential role in the growth of micro-finance enterprises from Mombasa County. Recommendations like better communications between micro-finance enterprises and the essentiality for better trained employees were made further stating that the government should strive to ensure that micro-finance enterprise managers are properly trained on emergent financial trends like capital budgeting. Some simple capital budgeting techniques like payback period should be taught at even technical colleges.

Keywords: Multinational enterprises, Capital Budgeting, Mutually exclusive projects, Capital constraint, Informal sector

Edition: Volume 4 Issue 5, May 2015,

Pages: 42 - 47

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