GREAT ZIMBABWE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND FINANCE

An investigation into the impact of inflation on capital budgeting decisions. A case study of Delta Beverages Masvingo Sorghum for the period 2000-

Dec 2008

BY

TADIWANASHE PHILLIP NDOFIREPI

REGISTRATION NUMBER: M061157

SUPERVISOR: MR M AVAZA

This dissertation is submitted in partial fulfillment of the requirements of the Bachelor 0f Commerce in Accounting Honours Degree in the Department of Accounting and Finance at

Great Zimbabwe University.

Masvingo: Zimbabwe, June 2010

APPROVAL FORM

The undersigned certify that they have supervised the student Ndofirepi

Tadiwanashe Phillip's dissertation entitled An investigation into the impact of

inflation on capital budgeting decisions. A case study of Delta Beverages

Masvingo Sorghum for the period 2000 – Dec 2008 submitted in Partial

fulfillment of the requirements of the Bachelor of Commerce in Accounting

Honours Degree at Great Zimbabwe University.

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SUPERVISOR DATE

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CHAIRPERSON DATE

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EXTERNAL EXAMINER DATE

RELEASE FORM

NAME OF STUDENT: NDOFIREPI TADIWANASHE PHILLIP

DISSERTATION TITLE: An investigation into the impact of

inflation on

capital budgeting decisions. A case

study of

Delta Beverages Masvingo Sorghum for

the

period 2000 – Dec 2008

DEGREE TITLE: Bachelor of Commerce Honours Degree

in Accounting

YEAR THIS DEGREE GRANTED: 2010

Permission is hereby granted to the Great Zimbabwe University Library to

produce single copies of this dissertation and to lend or sell such copies for

private, scholarly or scientific research purpose only. The author reserves other

publication rights and neither the dissertation nor extensive extracts from it may

be printed or otherwise reproduced without the author’s written permission.

SIGNED: …………………………………………………

PERMAMENT ADDRESS: 6731 Matsapa Crescent

Mucheke D

Masvingo

DATE: June 2010

DEDICATION

To Amasa and Elizabeth loving my parents.

TABLE OF CONTENTSAPPROVAL................................................................................................................................................... ii

RELEASE FORM........................................................................................................................................... iii

DEDICATION................................................................................................................................................ iv

TABLE OF CONTENTS...................................................................................................................................v

ACKNOWLEDGEMENTS.............................................................................................................................viii

ABSTRACT................................................................................................................................................... ix

LIST OF TABLES.............................................................................................................................................x

LIST OF APPENDICES...................................................................................................................................xi

CHAPTER ONE..............................................................................................................................................1

INTRODUCTION TO THE STUDY...................................................................................................................1

1.0 Introduction..................................................................................................................................1

1.1 Background to the problem..........................................................................................................1

1.2 Statement of problem...................................................................................................................2

1.3 Purpose of the Study.....................................................................................................................3

1.4 Research Objectives......................................................................................................................3

1.5 Research Questions.......................................................................................................................3

1.6 Statement of hypothesis...............................................................................................................4

1.7 Assumptions..................................................................................................................................4

1.8 Definition of terms........................................................................................................................4

1.9 Delimitations.................................................................................................................................5

1.10 Limitations.....................................................................................................................................5

1.11 Summary.......................................................................................................................................6

CHAPTER TWO.............................................................................................................................................7

LITERATURE REVIEW....................................................................................................................................7

2.0 Introduction..................................................................................................................................7

2.1 Inflationary Trends in Zimababwe.................................................................................................7

2.2 Financial decision making and economic instability......................................................................8

2.3 Cost of capital and Inflation........................................................................................................9

2.4 The Fisher Effect.......................................................................................................................11

2.5 The Efficient Frontier Technique.............................................................................................13

2.6 Risk-free rate...............................................................................................................................13

2.7 Cashflows and inflation............................................................................................................14

2.8 Discounted Cashflow................................................................................................................15

2.9 Incremental analysis.................................................................................................................18

2.10 Inflation versus product pricing and investment behavior..................................................19

2.11 Research Design and methodologies on data gathering.....................................................25

2.4 Summary....................................................................................................................................25

CHAPTER THREE........................................................................................................................................26

RESEARCH METHODOLOGY.......................................................................................................................26

3.0 Introduction................................................................................................................................26

3.1 Research Design..........................................................................................................................26

3.2 Population.................................................................................................................................27

3.3 The Sample..................................................................................................................................27

3.4 Sampling Procedure....................................................................................................................28

3.5 Research Instruments.................................................................................................................28

3.6 Data Collection Techniques.........................................................................................................29

3.6.1 The Questionnaire Method..............................................................................................29

3.6.2 The Inteview Method...........................................................................................................31

3.7 Data Analysis...............................................................................................................................32

3.8 Summary.....................................................................................................................................32

CHAPTER FOUR..........................................................................................................................................33

DATA ANALYSIS AND PRESENTATION OF FINDINGS..................................................................................33

4.0 Introduction................................................................................................................................33

4.1 Data Presentation.......................................................................................................................33

4.2 Research Findings........................................................................................................................34

4.2.1 Respondents’ understanding of hyperinflation.............................................................34

4.2.2 Investment appraisal methods and hyperinflation.......................................................35

4.2.3 The relationship between hyperinflation and capital budgeting................................36

4.2.4 Level of expertise and external advice............................................................................36

4.2.5 Workshops and training...................................................................................................37

4.2.6 Major causes of hyperinflation........................................................................................38

4.3 Summary.....................................................................................................................................39

CHAPTER FIVE............................................................................................................................................40

CONCLUSIONS AND RECOMMENDATIONS................................................................................................40

5.0 Introduction................................................................................................................................40

5.1 Summary of Findings...................................................................................................................40

5.2 Recommendations......................................................................................................................41

5.3 Summary of the research........................................................................................................42

5.4 Conclusion...................................................................................................................................43

REFERENCES..............................................................................................................................................44

Appendix A................................................................................................................................................46

Appendix B................................................................................................................................................48

Appendix C................................................................................................................................................50

ACKNOWLEDGEMENTS

The author would like to thank all those who contributed towards the completion

of this study, especially my supervisor Mr. Mavaza. I am sincerely grateful for the

knowledge and guidance you imparted to me. Thank you also to all my siblings,

relatives and friends for their support. May you the good Lord bless you. The

following people from Delta Beverages are appreciated for assisting the author

with valid information; Nyasha Denga, Grace Dunira, Success Mpepu, and

Lovemore Mufaduku. Thank you so much for making this research project a

success.

ABSTRACT

Capital budgeting plays an important role in decision making and planning in

organisations. It was this research’s objective to explore the effects of inflation on

capital expenditure at Delta Masvingo Sorghum in years 2000-2008

The research covered the period 2000-2008, the period that Zimbabwe

experienced hyperinflation. The research reveals the theoretical and empirical

evidence based on the subject. In gathering information, interviews and

questionnaires were the research tools used. The responses reflected that

hyperinflation made it difficult to make capital investment decisions at Delta

Beverages. The conclusion therefore was that It is critical that capital budgeting

be monitored for effectiveness to ensure it continues to be an important financial

measurement tool.

LIST OF TABLES

TABLE 3.1: COMPOSITION OF SAMPLE.................................................................................26

TABLE 4.1: QUESTIONNAIRE AND INTERVIEW R ESPONSE RATE................................................32

LIST OF APPENDICES

APPENDIX A: QUESTIONNAIRE FOR MANAGEMENT.....................................................44

APPENNDIX B: QUESTIONNAIRE FOR FINANCE.............................................................46

APPENDIX C: INTERVIEW SCHEDULE............................................................................48

CHAPTER 1

INTRODUCTION

1.0 Introduction

The chapter looks at the background of the study, statement of the problem, purpose

of the study, objectives, research questions, statement of hypothesis, assumptions,

definition of terms, delimitations, limitations of the study and summary.

1.1 Background to the problem

Enhanced uncertainty of the business environment in Zimbabwe in the period 2000

to Dec 2008 affected decisions about which capital projects were to be undertaken

by firms. Therefore financial managers had to consider various issues carefully

before making any capital budgeting decisions. Inflation was one of the important

parameters that governed the financial issues especially capital budgeting decisions.

Managers evaluate the estimated future returns of competing investment

alternatives. Some of the alternatives considered may involve more risk than others.

For example, one alternative may fairly assure future cash flows, whereas another

may have a chance of yielding higher cash flows but may also result in lower returns.

It is because, apart from other things, inflation plays a vital role on capital budgeting

decisions and is a common fact of life all over the world. Inflation is a common

problem faced by every finance manager which complicates the practical investment

decision making than others.

1

“Of late, Zimbabwe has been experiencing instability both on the political and

economic front. The level of inflation has exceeded quad digit level standing at

898,876,3% as of December 2008 according to official statistics” (The Standard 18

January).

Most of the managers are concerned about the effects of inflation on the project’s

profitability. Though a single digit rate of inflation has become a notable feature in

Zimbabwe, management should consider this factor carefully while taking such

decisions. Also to be noted are the Zimbabwe’s recent indigenisation laws which

make it riskier to making capital budgeting decisions. In practice, management do

recognise that inflation exists but rarely incorporate inflation in the analysis of capital

budgeting, because it is assumed that with inflation, both net revenues and the

project cost will rise proportionately, therefore it will not have much impact. Inflation

influences two aspects viz. Cash Flow, Discount Rate and hence this study is an

attempt to analyse the issues in the area of effects of inflation on capital budgeting

decisions for optimum utilisation of scarce resources.

1.2 Statement of the problem

Hyperinflation, policy inconsistency and uncertainty have caused financial stress in

industries leading to shrinkage in both local and foreign direct investment. Delta

Beverages has not been immune to these expected benefits being eroded by

inflation. There is need to find ways by which entities can effectively and efficiently

make financial decisions with respect to capital budgeting so as to be able to invest

and reap the desired financial gains from the investment projects being undertaken.

2

There should be ways taken by companies in order to cushion themselves from the

negative effects of hyperinflation, even if the recession period has come to an end

1.3 Purpose of Study

The study was carried out in order to fulfil the requirements of the degree program at

Great Zimbabwe University and secondly to review the effects of an unstable

economic environment to Delta Beverages’ Capital Budgeting and cost estimation

efforts.

1.4 Objectives

The objectives of this research were;

To identify the relationship between inflation, cost of capital and risk.

To examine the problems and benefits associated with applying the standard

finance theories with regards to capital budgeting in an inflationary

environment.

To identify alternatives companies have in an inflationary environment in order

to manage and make proper cost of capital estimations.

1.5 Research questions

Does a relationship exist between the cost of capital and inflation, that is,

relationship between inflation in the aggregate and capital budgeting?

Were companies in Zimbabwe using the traditional investment appraisal

methods in making financial decisions and are they of significance in the

uncertain economic environment

3

What other strategies or tools was the management using to make sound

financial decisions in this economic environment?

1.6 Statement of hypothesis

Null: Capital expenditure decision-making is difficult to due to uncertainty caused

by hyperinflation and related issues.

ALTERNATIVE: Capital expenditure decision-making is not made difficult by

uncertainty caused by hyperinflation and related issues.

1.7 Assumptions

The research would be successful.

Data and information provided by the respondents are free from bias.

The methodology adopted in the research was appropriate.

The sample of selected entities is a true representation of the population.

Respondents responded honestly an earnestly.

1.8 Definition of terms

DCF- Discounted Cash Flow

NPV- Net Present Value

CAPM- Capital Asset Pricing Model

Inflation- A rise in prices or fall in the purchasing power on money.

4

Macroeconomic Environment- The behaviour of broad aggregates in the

economy for example the total level of investment, volume of

employment, general level of wages in the economy and inflation.

1.9 Delimitations

This research concentrates on Zimbabwean companies with a bias to Delta

Beverages Sorghum Manufacturing Masvingo in the hyperinflationary era of

2000 to 2008 with particular focus on the effects of an unstable economic

environment to decision making. The thrust of the study was to see how the

management capital expenditure was implemented and affected by

hyperinflation.

The researcher focuses on the Finance and management departments involved

in long term financing needs of the company and prepare capital budgets

periodically. The management is also responsible for ensuring that shareholder

value is maximised and protected.

1.10 Limitations

Resources are limited so as to produce a well- detailed project. This ranges from

financial constraints as well as time. The research was carried out concurrently

with the attachment period.

5

For the sake of confidentiality, respondents may deny the researcher access to

information they consider sensitive. The researcher had to work with information

made available to him.

As a student, the researcher does not have continuous reliable sources of

income and this limits the research efforts to make a more detailed research.

1.11 Summary

This chapter looked at the at the background of the study, statement of the problem,

purpose of the study, objectives, research questions, statement of hypothesis,

assumptions, definition of terms, delimitations, limitations of the study and the next

chapter looks at the literature review

6

CHAPTER 2

LITERATURE REVIEW

2.0 Introduction

This chapter provides a review of the literature on capital budgeting .It looks at the

various literature that have dealt with inflation trends in Zimbabwe, financial decision

making and economic instability, cost of capital and inflation, the fisher effect,

efficient frontier technique, risk free rate, cash flows and inflation, discounted cash

flow, incremental analysis, inflation versus product pricing and investment behavior

and research design and methodologies of data gathering.

2.1 Inflationary Trends in Zimbabwe

The diagram below highlights the inflation trends in Zimbabwe for a ten-year period

depicting hyperinflation from 1996 to 2006.

7

0

200

400

600

800

1000

1200

1400

1600

1800

Zimbabwe's 10 Years Annual Inflation

Inflation Rate

Infl

ati

on

(%

)

Figure 2.1: Inflation Trends in Zimbabwe over the Past 10years

Source: Financial Gazette 4-10 January 2007(www.fingaz.co.zw)

2.2 Financial decision making and economic instability

According to Mills (1996), “A major impact on both financial theory and the practice

of financial decision making has been the economic instability, especially in prices,

evidenced in the U.S. economy since the mid 1960’s. Inflation in the past few years

has not been a major macroeconomic problem, but its specter, as demonstrated by

the Federal Bank recent increases in interest rates, is never for the agendas of

financial decision makers. Macro economic instability has necessitated that

expectations about the future rate of inflation be taken into consideration in making

decision(s) about which capital projects will be undertaken by the firm. Nominal cash

flows determine its degree of profitability. However, in making the capital budgeting

decision both real and nominal concepts must be considered. “

8

Capital budgeting analysis is a process of evaluating how we invest in capital assets;

i.e. assets that provide cash flow benefits for more than one year. We are trying to

answer the following question:

Will the future benefits of this project be large enough to justify the investment given

the risk involved?

Decision-making is increasingly more complex today because of uncertainty.

Additionally, most capital projects will involve numerous variables and possible

outcomes. For example, estimating cash flows associated with a project involves working

capital requirements, project risk, tax considerations, expected rates of inflation, and

disposal values. We have to understand existing markets to forecast project revenues,

assess competitive impacts of the project, and determine the life cycle of the project. If

our capital project involves production, we have to understand operating costs, additional

overheads, capacity utilization, and start-up costs. Consequently, we cannot manage

capital projects by simply looking at the numbers; i.e. discounted cash flows. We must

look at the entire decision and assess all relevant variables and outcomes within an

analytical hierarchy.

In financial management, we refer to this analytical hierarchy as the Multiple Attribute

Decision Model (MADM). Multiple attributes are involved in capital projects and each

attribute in the decision needs to be weighed differently. We will use an analytical

hierarchy to structure the decision and derive the importance of attributes in relation

to one another. We can think of MADM as a decision tree, which breaks down a

complex decision into component parts.

9

Arnold (2002) asserts that inflation creates two problems for project appraisal. First, the

estimation of future cash flows is made troublesome. The project appraiser will have the

degree to which future cash flows will be inflated. Second, the rate of return required by

the firm’s security holders such as shareholders would rise if inflation rises. Thus,

inflation has an impact on the discount rate used in investment evaluation.

2.3 Cost of Capital and Inflation

Cost of capital is the required rate of return on the various types of financing. Due to

the various forms of financing in investments, firms tend to use the overall cost of

capital which the proportionate of the costs of the various components of the firm’s

financing which are equity capital, debt and preferred stock. Due to hyperinflation

preferred stock is not used, as it cannot appreciate in value against rampant inflation.

In explaining the relationship between cost of capital and inflation, Bailey and

Jensen (1977), state that it has been argued that the market rate of interest already

embodies the price level effect and that the rate will be unique. This statement in

itself is unusual, since the argument that nominal rates of interest, hence the nominal

cost of capital, contain an inflation premium back to the Fisher effect and is generally

accepted. Since the discount rate is a major determinant of the investment decision,

its relationship to inflation is of more than just passing interest in determining the

overall impact of inflation on capital spending. Incorporating the loanable funds

theory that states that an increase of inflation rate also causes an increase in interest

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rates this will also have an impact on the movement of cost of capital when inflation

occurs.

Since it is reasonable to expect that the rate of interest will increase when the are

expectations of higher inflation, the cost of capital on an ex ante basis increases with

the same proportion as the expected rate of inflation; that is, the same mechanism

which causes interest rates to rise during inflation will also cause the cost of capital

to rise. Short-term phenomena may prevent the cost of capital from behaving

precisely in this fashion. One action may be for business to alter capital structure,

moving towards greater amounts of debt and thus lowering the after tax cost of

capital. However, these corrections are not long term and in case of rising debt costs

should have little impact on the overall movement of capital from rising proportionally

with expected inflation, but this too should not prevent a long term assumption that

the cost of capital does increase when the expected rate of interest rises.

2.4 Fisher Effect

One of the most important concepts that we need to master is the impact of

expected inflation on the required returns we observe in Capital Markets. The

fundamental relationship here is the Fisher Effect first formalised by Irving Fisher in

his famous 1900 text (though the roots of the notion can be traced back to the

famous philosopher David Hume in the 18th century). Fisher’s fundamental insight is

that Capital Market participants are always guessing what future inflation will be and

building these guesses of future inflation into the yields on the securities that they

buy and sell.

11

Fisher argues that Capital Markets should constantly be assessing future inflation

and building that guess into interest rates. He posited that there is a real rate of

interest in addition to the nominal rate that we observe in the market. Where the

Fisher Effect is normally presented as:

rnominal = rreal + iexpected inflation

The exact Fisher Effect formula is:

rnominal = rreal + iexpected inflation + (rreal x iexpected inflation)

Copeland et al, (1992), show that since investment and security returns are based

on expected future returns, the anticipated inflation rate should be reflected in the

required rate of return on the project or the applicable cost of capital for the project.

This relationship is recognized in financial economics and is known as the Fisher

Effect. In formal terms, we have:

(1+r)(1+n) = (1+k),

Where k is the required rate of return in nominal terms, n is the anticipated annual

inflation rate over the life of the project, and r is the real rate of return. Thus the

market data that is used in estimation of current costs of capital should include a

premium for the anticipated inflation.

In a Capital Budgeting situation we are supposed to estimate our firm’s Weighted-

Average-Cost-of-Capital (WACC). To do this we have to estimate the current

required returns of the firm’s security holders. However, when we estimate these

yields on the stocks and bonds, we know we that these are nominal rates that

12

include the guesses of future inflation. On the other hand, we should consider what

goes on when we make up our guesses of sales and cost-of-goods-sold.

Gitman (2003) charges that, changes in inflationary expectations affect the risk –

free rate of return, Rf, thus:

Rf = k + IE

Where: k is the real rate of interest,

IE is the increase or decrease in inflation.

Drury (2000) further notes that, inflation affects future cash flows and the return that

shareholders require on the investment (i.e. the discount rate). The discount rate

consists of the required rate of return on a risk less investment plus a premium that

is related to a project’s risk, inflation affects both the risk-free interest rate and the

risk premium. A further analysis of this situation will then lead to the Fisher Effect

(explained above) that relates nominal rate of interest to the real rate of interest and

the rate of inflation.

2.5 Efficient Frontier Technique

Elton and Gruber et al (2003), further analyse the issue employing the efficient

frontier technique. The concept is widely used in practice to make asset allocation

decisions for long-term investment, particularly for pension fund assets. They argue

that when the investment horizon is measured in decades, it is important to consider

how the change in the purchasing power of currency affects investment choice. In

particular, investors may care more about future purchasing power value of the

portfolio, which is the value after adjusting the effects of inflation, than they care

about the future nominal value of the portfolio. Thus one approach to this problem is

13

to apply the efficient frontier technique to inflation – adjusted returns. This therefore

means that to bring value to the owners of capital in hyperinflationary environments,

it is important to make sure that the returns that are being expected from such

investments are inflation adjusted and one method is the use of the efficient frontier

technique. An economically unstable environment erodes value out the

shareholders’ wealth so it is of paramount importance that the capital budgeting

decisions encompass all factors affecting the cost of capital.

2.6 Risk-free rate

Van Horne et al (2003) notes that it is important that the risk –free rate and the

expected market return are the best possible estimates of the future. This is to try by

all means to make the best assessment of the project being undertaken to consider

its viability.

Copeland (1992) further gives more detail by explaining inflation risk in relation to

overseas investments. He states that assuming there is no inflation in the United

States and the inflation in England is uncertain, the dollar value of America’s

investment in England at the end of the period is uncertain and hence risky. There is

an exchange risk and it is clear that the exchange risk is simply an inflation risk.

Horngren (1991) explains that when analyzing inflation in capital decisions, it is

important to distinguish between real rate of interest and the nominal rate of interest.

He explains that real rate of interest is comprised of two elements: (a) a risk- free

element – the “pure” rate of interest that is paid on long-term government bonds, and

(b) a business –risk element – the risk premium above the pure rate that is

14

demanded for undertaking risks. Nominal rate of interest is also comprised of two

elements: (a) the real rate of interest, and (b) an inflation element – the premium

demanded because of the anticipated decline in the general purchasing power of the

monetary unit. Thus the inflation premium is of importance in dealing with huge

investments in an environment that is experiencing hyperinflation like Zimbabwe.

2.7 Cash Flows and Inflation

Van Horne (1971) says that to be consistent, inflation in forecasting cash flows must

be reflected in a discount rate containing inflation; that is, a bias is introduced if

nominal cash flows are discounted at the real and not nominal cost of capital.

Nominal cash flows must be treated with nominal costs of capital.

According to Drury (2000), the increase in cash flows from year to year due to

inflation is an illusion because it is offset by a decline in the purchasing power of the

monetary unit. Rather than expressing cash flows in one-year monetary units it is

more meaningful to express the cash flows in today’s purchasing power or monetary

unit (that is, in real cash flows). When cash flows are expressed in monetary units at

the time when they are received they are described as nominal cash flows whereas

cash flows expressed in today’s (that is, time zero) purchasing power are known as

real cash flows. Therefore, nominal cash flows are converted to real cash flows by

using the formula.

Real cash flow = Nominal cash flow + (1 + the anticipated rate of

inflation) n

Where n is the number of years the cash flow is expected from the project.

15

2.8 Discounted Cash Flow

Van Horne (2003) gives insight into the issue by stating that in estimating cash

flows, anticipated inflation must be taken into account. Often there is tendency to

assume erroneously that inflation levels will remain unchanged throughout the life of

the project. If the required rate of return for a project to be accepted embodies a

premium for inflation, (as it usually does), then estimated cash flows must also reflect

inflation. Such cash flows are affected in several ways. If cash inflows ultimately

arise from the sale of a product, expected future prices affect these inflows. As for

cash outflows, inflation affects both expected future wages and materials costs.

This therefore entails that all cash flows must be discounted for, so as to give a more

accurate measure of the real value of the cash flows. Discounted Cash Flow analysis

is a family of techniques that include Net Present Value, Internal Rate of Return and

the Profitability Index.

a. Net Present Value (NPV)

Brigham (1978) notes the following:

i. Inflation factor is reflected in Weighted Average Cost of Capital (WACC),

which is used to find NPVs, and as the hurdle rate if Internal Rate of Return

(IRR) or Modified Internal Rate of Return (MIRR) is used. Therefore inflation is

reflected in the cost of capital part of a capital budgeting analysis.

ii. NPV = CF

16

(1+k) t

k includes a premium for expected inflation so the higher the expected

inflation rate, the larger the value of k and other things being equal, the

smaller will be the NPV.

iii. If inflation is expected, but this expectation is not built into the forecasted

cash flows, then the calculated NPV will be incorrect –it will be downward

biased. This therefore calls for sales prices over the life of the project to be

built into the sales revenues.

This analysis explicitly shows that inflation effects must be considered in project

analysis, the best procedure being to build inflation effects directly into cash flow

estimates.

b. Internal rate of Return

Besides determining the Net Present Value of a project, we can calculate the rate of

return earned by the project. This is called the Internal Rate of Return. Internal Rate

of Return (IRR) is one of the most popular economic criteria for evaluating capital

projects since managers can identify with rates of return. Internal Rate of Return is

calculating by finding the discount rate whereby the Net Investment amount equals

the total present value of all cash inflows; i.e. Net Present Value = 0.

If the Internal Rate of Return were higher than our cost of capital, then we would accept

the project. For example, assuming an IRR of 8% and a cost of capital of 12%, we would

not invest in this project as the expected returns are below the market rate of capital.

17

c. Profitability Index

Pike and Neale (2002) advances that, the profitability index is the ratio of the

present value of project benefits to the value of initial costs. Projects with Profitability

index greater than 1.0 are acceptable. The P therefore gives the present value of

benefits per $1 of initial outlay. As such, it indicates the ‘profitability’ per $1 invested,

and is thus a measure of the productivity or financial efficiency of the project. This

index is calculated as:

PI = PV benefits

PV outlay

Since the index is also a function of discounted cash flows, it is expressed with a

relationship to NPV as follows:

PI = NPV

PV of outlay

All these discounted cash flow techniques show that a proper appraisal of a project

in n economically unstable environment, all the cash flow that are expected from the

project should be discounted so as to take account of the hyperinflationary

environment.

2.9 Incremental Analysis

According to Pike and Neale (2002), decision-making can be viewed as an

incremental activity. Project cash flows usually arrive throughout the year and these

cash flows may involve monthly payments to creditors and expenses, daily receipt of

18

cash from customers throughout each year. Thus these cash flows should be

identified on a monthly, even daily, basis and discounted using appropriate discount

factors. Businesses generally operate as going concerns with fairly clear strategies

and well-established management processes. Decisions are not so much seen in

isolation but as part of a sequence of actions seeking the organization from its

current to its intended position. Thus the decision maker must assess how the

business changes as a direct result of selecting the project. Every project can be

either accepted or rejected, and it is the difference between these two alternatives in

any time period, t, expressed in cash flows (CFt) that is taken into the appraisal. The

incremental analysis is shown as below:

Project CRt = CFt for firm with project – CFt for firm without project.

The incremental analysis thus shows that even when evaluating a project by the

various methods, its worthiness in these hyperinflationary environments, further

analysis can be done by comparing the firm’s discounted cash flows with those of a

firm without a similar project. The project is worthy taking if the comparison proves

favourable to the firm. Above all, the impact of inflation on the cash flows is of major

concern.

2.10 Inflation versus product pricing and investment behaviour

Mills (1996), explains that in traditional capital budgeting theory, the equilibrium

position will be such that the firm will continue to invest up to a point where marginal

costs equal marginal revenues. Citing an example where the current assets of a firm

19

are $ 10 million and current liabilities excluding debt are $ 5 million, then a 10%

increase in prices will increase both current assets and current liabilities by 10%.

Current assets would rise by $ 1 million, but current liabilities by $ 500 000, leaving $

500 000 financed.

This additional financing requirement must be included in the capital budgeting

decision-making process, or else the net cash flow and the net present value are

overstated. The question that now has to be solved is how will the deficit covered

especially in this hyperinflationary environment? The solution lies in the decision

makers factoring this effect in the prices that will be charged in the products that will

be produced from the investment.

Poor planning may result in charging prices that are not viable or that will result in

the depletion in the capital base of the investment, as hyperinflation will outdo the

project’s capacity to finance itself internally through net cash resources from sales of

the prices. This therefore means that for the project to continue to survive in

hyperinflationary environments, product pricing should be properly coordinated.

According to Mehta et al (1988), ‘profitability of investment proposals is influenced

by the inflationary environment on several counts that are:

Inflation may reflect leads and lags in costs and revenues that are not fully

reflected in contractual agreements.

The volume of sales may be influenced by the economy- wide inflation.

20

Working capital requirements may change due to an increase in the inflation

rate.’

Thus hyperinflation has a major impact on investment appraisal and this should be

carefully taken into account before a project is launched so that the pricing will give

true value to the shareholders.

The impact of inflation on product pricing can also be further expounded in the

following way. Managers can only accept equal increases in revenues and costs if

they are willing to lower the amount of profit acceptable from a capital project. And at

the margin, the effect introduction of inflation would cause the project to be rejected.

Rappaport and Taggart (1982) state that there is no requirement that this rate be

the economy wide inflation rate, but for most firms one would expect that the rate to

be reasonable approximation of the case for the cost side of the firm. Thus inflation

of revenues must tend to be larger than inflation of costs if the NPV is to remain the

same.

At this point consider the following example. In Table 1, data is given for two nearly

identical projects, A and B, whose only difference is in the type of investment

required. A requires $200,000 and B requires $200,000 but A’s investment is in net

working capital while B’s is in depreciable plant and equipment.

21

TABLE 1

Summary of Project Data

Project A Project B

Years 5 5

Tax Rate 0.45 0.45

Quantity (units) 1000 1000

Cost Per Unit ($) 250 250

Discount Rate 3% 3%

Inflation Rate 0 0

Investment in Net Working Capital ($) 200,000 0

Investment in Plant & Equipment ($) 0 200,000

If the missing variable is to be solved from the above situation, the price of the

project necessary to justify the undertaking of the investment that is the price at

which the NPV is zero, then for case A and B the price is as follows:

Case A: $260.91 Case B: $296.67

The higher price in Case B is the result of the fact that only 45% of investment costs

are recovered through the tax shield from depreciation, whereas 100% of the net

working capital is recovered. It is true that the depreciation is recovered faster, but at

a low discount rate this faster recovery is not sufficient to overcome the loss of 55%

of the initial investment on a cash basis. The results above are for a world with zero

inflation. If we introduce inflationary expectation of a steady rate, say 12% into the

22

system, the results would be to increase both costs and the discount rate. If we

assume that the relationship between inflation and the discount rate is as previously

described, 12% inflation would produce a 15.36% discount rate. If we increase the

product price by the amount of the expected rate of inflation, and test for NPV we

find the following results:

NPV

Case A ($101,637)

Case B ($ 33,302)

The substantially lower NPV for Case A reflects the problems caused by the

presence of net working capital during periods of inflation. In this case the inflation

causes an addition to the net working capital each year, and the additions are cash

outflows, which are not recovered until the end of the project. In case 2, the only

effect was to reduce the tax flow from the depreciation shield. Thus if prices only

kept pace with inflation, both projects are unacceptable, but the project with the

higher net working capital is more unacceptable. The degree to which prices must

increase to bring the investment back to an acceptable level can be computed. For

each case the results are as follows:

Case A Case B

Price Increase Necessary

To Product “0” Under 22.3% 15.9%

12% Inflation

Case A, with its net working capital, requires almost a doubling of the rate of cost

inflation in order to keep the company’s project profitability unchanged, while Case B

23

requires only a slightly higher than inflation price increase. This therefore means that

in a hyperinflationary environment, in order to keep the level of profitability

unchanged, product pricing must not be overtaken by the inflation rates but must

keep track with the level of inflation.

An analysis of product investment in hyperinflationary environments has significant

implications for corporations, and these implications go beyond the capital budgeting

decision. Certainly the capital budgeting decision itself is significantly affected by the

existence of inflation and higher inflationary expectations, and of critical importance

is that the capital budgeting decision is not neutral even if prices of output are

expected to rise at the same rate as costs and the cost of capital. Mills (1996) notes

that the implications of an increase in the expected rate of inflation on the capital

budgeting process and decision making is as follows:

1. Assuming the firm could not raise output prices above the general rate of

inflation, the firm would have to accept lower NPV and hence lower

profitability as measured by NPV. At the margin, the firm would have to

forego investment projects unless output prices could be raised at a rate

greater than the general expected rate of inflation. The exact amount, which

prices would have to be raised, is dependent upon the degree of net working

capital required relative to the overall level of investment.

2. A firm does have a number of ways in which it can respond to the problems

created by inflation. There are three major areas that could be addressed in

an attempt to offset the negative impact of rising price levels. One action

24

would be to raise output prices above the level of inflation, but the ability of

the firm to do so will be limited to the extent that the market will withstand the

higher prices. Market structure will play an important role here, with the more

oligopolistic firms enjoying greater success than the more competitive firms.

However, in the long run, this will lead to high inflation and thus may be self-

defeating. Unless other adjustments are made, the investment sector of the

economy could under allocate resources to new investment projects.

3. Two internal adjustments that can be made are with respect to net working

capital and the capital structure. As the previous analysis has shown, during

inflation firms will be under pressure to reduce the amount of net working

capital employed by decreasing inventory and receivables and extending

payables. This reduces the exposure of capital requirements increasing

during the inflation.

With respect to the discount rate, the major adjustment that a company can make is

in its capital structure. The inflationary increase in the discount rate can be offset to

some degree by increasing debt in the capital structure and lowering the weighted

cost of capital. This action, however, is not available to all firms, only to those who

begin the inflationary period with a relatively low amount of debt in the capital

structure. Due to the above, one would expect that the degree of leverage employed

by firms increases during inflationary periods. Moreover, to the extent that this is

“unplanned” debt, it is more likely a firm would finance this debt from short term

rather than long-term borrowings. As the inflation eased, the firm would find it much

easier to return to a more normal capital structure by replacing short-term debt with

25

retained earnings. This would suggest that the demand for short-term funds would

rise rapidly during the periods of inflation.

2.11 Research Design and methodologies on data gathering

This research used the descriptive survey. This is so because the data suitable for

this research was qualitative in nature. The researcher used questionnaires and

carried out personal interviews with the finance department and management.

2.12 Summary

This chapter, identified and examined the literature related to the main elements of

capital budgeting. It looked at inflation trends in Zimbabwe, financial decision making

and economic instability, cost of capital and inflation, the fisher effect, efficient

frontier technique, risk free rate, cash flows and inflation, discounted cash flow,

incremental analysis, inflation versus product pricing and investment behaviour and

research design and methodologies of data gathering. The next chapter looks at

research methodology.

CHAPTER 3

RESEARCH METHODOLOGY

3.0 Introduction

This chapter gives a description of the research methodology, embracing all the

activities and procedures undertaken during the study. The chapter outlines the

research design, the population, and the sample, sampling procedures, research

26

instruments, the questionnaire method, the interview method, data collection data

analysis and summary.

3.1 Research Design

In this research, a descriptive survey design was used. A descriptive study is used

when researchers want to understand the characteristics of certain phenomena

underlying a particular problem. Dooley (2007) survey is a method for collecting

information on a sample by the administration of a questionnaire. This Implies that

factual data was collected by the researcher from a given sample through data

collection methods.

Descriptive research focuses on the accurate description of the variables in the

problem model. Descriptive research is appropriate when problems are fairly well

defined but the purpose is not to investigate the relations. Eriksson and

Wierdershim- Paul (1997)

3.2 Population

The population of this study was all the senior managers, supervisors and finance

department members at Delta Beverages Masvingo Sorghum for the period from Jun

2000 to December 2008 and anyone with meaningful impact on the investment

decision making process. A research population thus refers to a group of species

living in the same place at the same time hence it is a group from which the sample

27

to be questioned will be picked. A population is accordingly an aggregation of

elements from which the sample is actually drawn from.

3.3 The Sample

A sample is a representative of the population from which it is drawn. This means a

sample is a small group of people taken out of the mother group (population). The

sample should be representative; the characteristics of a sample are the same as

that of the population from which it is drawn. The sample was comprised of four

managers, five supervisors and six finance department members as shown in Table

3.1 below.

Table 3.1: Composition of Sample

Responding sector Total respondents

Management 4

Supervisory 5

Finance 6

Total Size 15

The sampling unit is a single group of elements subject to selection in a sample. In

this study the sampling unit is the finance department and senior management.

28

3.4 Sampling procedures

In this study random sampling was used. The subjects were drawn from a sample of

management and the finance department as they are heavily involved in the capital

budgeting process. The respondents were chosen on the basis of their strategic

influence on to the capital budgeting system at the company. The sample consisted

of a total of fifteen people, four managers, five supervisors and six finance

department members.

The selected sample is a representative proportion of the target populated used in

the collection of data consistent with the pre-determined research objective. The

sample’s characteristics are synonymous with the population under study.

3.5 Research Instruments

In order to find the extent to which the problem of inflation affects the capital

budgeting process this research employed the questionnaire and interview methods

for data collection from the finance department and management at Delta Beverages

Masvingo Sorghum.

3.6 Data Collection Techniques

Self-administered questionnaires and in-depth interviews were the main techniques

used in data collection. Data are the facts presented to the researcher from the study

29

environment. It is from this data that the researcher draws conclusions for the

research study. In this case, it is the data specifically collected to investigate the

effectiveness of capital budgeting measures in a hyperinflationary environment.

The research distributed four management questionnaires to fellow students. The

pilot testing helped the research in correcting areas where the pilot respondents

pointed out that needed clarity. Interview guidelines were also analyzed by the pilot

test and adjustments made thereon.

The researcher delivered the questionnaires personally to the respondents.

Interviews with top management were conducted on the same day as questionnaires

were administered. The researcher collected the questionnaires from the

respondents immediately after completion.

3.6.1 The Questionnaire Method

A questionnaire is an instrument consisting of a series of questions filled in by

respondents used to collect data from the research subjects. Tuckman (1978) a

questionnaire is a document containing questions designed to solicit information

appropriate for analysis. The questionnaire carried fifteen questions which were

based on three research questions of chapter 1 of this study seeking to find out the

relevance of capital budgeting in an inflationary environment.

30

The researcher chose the use of questionnaires as one of the main research tool

due to the various advantages that are brought about from the use of questionnaires.

Below are the chief reasons for the use of questionnaires:

A questionnaire saved time and was an inexpensive way of surveying a large

company with a wide section of departments.

A questionnaire allowed the researcher to align and narrow participants along the

critical thought of capital budgeting in a hyperinflationary environment.

Close-ended questions were also used which allowed easy analysis to reduce

ambiguity and to clarify the opinions of the population were the open ended

questions had failed.

Despite the advantages outlined above, the use of questionnaires had the following

limitations with respect to the acquisition of data by the researcher. These are

outlined below as:

Questionnaires might have been unclear or vague to respondents who did not

fully complete their sections thus feedback can be wrong.

Some respondents were unwilling to provide information even though the

researcher had made an assurance of confidentiality of results resulting in some

unanswered questionnaires.

Both open and close-ended questions were used. Close ended questions were used

because they were easier to administer and faster for data tabulation. Open-ended

questions required respondents to answer in their own words. They were used

because they do not restrict the respondent thus widening the scope of response

31

obtained. Open-ended questions were used and they gave information, which was

difficult to categorise, and summarize.

3.6.2 The Interview Method

The researcher carried out four in-depth interviews to solicit information from

management. There is a belief that an interview is a questionnaire administered by

the interviewer who is not allowed to deviate in any way from provided questions.

Implying that during the interview notes the responses made by the interviewee as

opposed to the questionnaire method where the respondent writes responses on the

questionnaire.

The advantages of in-depth interviews follow below:

The researcher had a great deal of flexibility and used his ingenuity to stimulate

management to reveal more of their attitudes and motives as in regards to the

effectiveness of capital budgeting.

The interviewer used probing to get information especially on complex and

sensitive questions especially the ones that involved the firm’s finance system.

The researcher was able to use non-verbal communication during interviews and

read facial gestures of respondents on sensitive topics.

Disadvantages of in-depth interviews are as follows

Respondents were at some point uneasy and intimidated by the in-depth

interview.

32

Respondent held back some important information when they felt that It would

not be in their best interest should it be known that they disseminated the

information.

3.7 Data Analysis

Data summarisation was used in this study. Initially the questionnaires were checked

for physical completeness. Qualitative data from the open-ended questions was

analysed to facilitate the drawing of conclusions through narrative explanation. Pie

charts, tables, bar graphs, and tables will be used, in the next chapter, to present

and analyze both primary and secondary data that was collected by the researcher.

Responses were condensed to avoid ambiguity for example strongly agree and

agree were taken to denote the same thing.

3.8 Summary

Descriptive research method was used in the research that is, both qualitative and

quantitative methods. A population of management and finance department

supervisors was used to investigate the impact of inflation on capital budgeting

efforts. Questionnaires and interviews were used as tools for collecting data because

they were easy to administer and appropriate for the research. The next chapter

looks at data presentation, analysis and discussion of the research findings.

CHAPTER 4

DATA PRESENTATION, ANALYSIS AND DISCUSSION

33

4.0 Introduction

This chapter presents, analyses, interprets and discusses research findings of the

study. In this chapter, the researcher presented the findings in graphs, pie charts,

tables and narratively.

4.1 Presentation, Analysis and Discussion of Data from Questionnaires and

interviews

Three of the sixteen questionnaires were sent to top management and five to

supervisors, seven were sent to the finance department. Four interviews were also

conducted with the top management. From total fifteen questionnaires planned and

distributed only twelve were returned and a total of four interviews were conducted

with to management and all were carried out. The three unanswered questionnaires

were for some finance department members who were committed to month-end

processing.

Instrument Planned or

distributed

Returned or

undertaken

Response rate

Interviews 4 4 100%

Questionnaires 15 12 80%

Table 4.1

The percentage response rate was 100% from interviews with management and

80% for questionnaires. The high response rate by management was due their

commitment to learn how they could prepare themselves to make capital investment

decisions in hyperinflationary environments.

34

4.2 Research Findings

The researcher gathered some findings detailed in this chapter on the impact of an

unstable environment on capital budgeting.

4.2.1 Respondents’ understanding of hyper-inflation

95% of the respondents indicated they were well versed with the hyperinflationary

macro-economic environment also showing that a moment in time had dealt with it.

The understanding however by most of them showed they basically saw it dealing

with the issue of rapid increase in prices of basic commodities. 4% understood

hyperinflation as basically an issue of rapid increase in prices of basic commodities.

1% did not know what hyperinflation meant at all. The pie chart below summarises

the responses given on the definition of hyperinflation.

Hyperinflation understanding levels

HighMidLow

Fig 1

4.2.2 Investment appraisal methods and hyperinflation

The researcher has observed that when inflation is high, projects with shorter life

spans will be favoured over those with longer expected lives because those with

shorter life spans will have their depreciation costs restated in current dollars more

35

frequently as they are replaced.

A combination of Net Present Value (NPV), Internal Rate of Return (IRR),

Discounted Payback, and Profitability Index (PI) were being used by the company

due to uncertainty and incorporation of the inflation rates that are prevailing and the

anticipated inflation rates. Fig 2 below shows the ratings according to the responses

the researcher received showing NPV as the most used measure in an inflationary

measure however with all being used for evaluation.

NPV

IRR

Discounted Payback

Profitability index

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%

Most usedUsedLeast used

Fig 2

4.2.3 The relationship between hyperinflation and capital budgeting.

Q: How did hyperinflation affect capital budgeting efforts of the entity?

36

The above question was asked to assess if those involved in capital decision-making

knew how hyperinflation affected the investment decisions of the company.

The researcher noted from this open ended questionnaire:

Spiraling of prices of inputs resulting in companies charging high prices for

their products.

The cash flows from production are Insufficient such that the capital

budgeting projects would not be accomplished in required time period.

Management is not able to plan in future due to constant increase of cost of

capital

4.2.4 Level of expertise and external advice

The questions here aimed at ascertaining whether the company engaged the correct

people to make capital investment decisions and how they were rated. The research

has established that the executive procurement committee which was the firm’s

ultimate expenditure decision making body did have knowledgeable persons. In their

own opinion and in the opinion of management the finance department was rated in

Fig 3 as follows:

37

Finance Department Capability Ratings

BadModerateGood

Fig 3

4.2.5 Workshops and Training

Majority of the respondents revealed that the entity ensured that their employees are

kept well up to date with the changes in the macro-economic environment. Most

employees highlighted that the knowledge at their disposal had been acquired from

workshops and less general sources such as the news, newspapers and economic

commentators addressing the public in general. This was also shown from data

gathered from the open ended question of knowledge of the macroeconomic

environment. Fig 4 below shows the relevance of sources of information and their

contribution to employees’ knowledge.

Sources of information

WorkshopsNewsEconomic commentatorsOther

Fig 4

38

4.2.6 The future of the firm and capital investment in uncertainty

The analysis shows that out of the four interviewed respondents, the majority

attributed the causes of hyperinflation to both political and economic factors. The

economy was failing due to politically motivated reasons. It therefore came out that

the economy was dependent on the stability of the political situation in our country.

Politics touched areas like the agricultural sector, manufacturing sector, and also the

tertiary sector. It was from this that it was derived that the causes of hyperinflation

were not independently economic and political but it was a combination of the two.

This analysis can be illustrated as follows.

Major causes of hyperinflation

PoliticalEconomicBoth

Fig 4

Further in the analysis it was observed that though factors could affect the firm

management said they could still steer through them making wise capital investment

decisions.

39

4.3 Summary

This chapter focused on the findings of the research, analysis and discussion of data

collected in relation to the set research objectives and research questions. The next

chapter looks at findings, conclusion and recommendations.

40

CHAPTER 5

FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter summarises the research findings, gives conclusions and

recommendations for an investigation into the impact of inflation on capital budgeting

decisions. It outlines the research findings and the recommendations to the

management of Delta Masvingo Beverages Sorghum on the measures that can be

taken so as to make sound capital expenditure decisions in a hyperinflationary

environment.

5.1 Summary of findings

The study, conducted at Delta Masvingo Sorghum found that:

There was a general understanding of the hyperinflationary environment

within the organisation but limited understanding of how it affected the

organisation in terms capital investment. Management was trying in its

capacity to counter the effects of hyperinflation in investment appraisal though

hyperinflation outstood their measures.

Uncertainties caused by hyperinflation resulted in the company struggling to

make capital budgeting decisions due to difficulties in forecasting the cash

flows and the appropriate discount rate to be used in evaluating the projects

at hand. The company struggled to set aside enough resources to complete

some of the projects that had been planned as the funds were eroded by

inflation.

41

Investment appraisal techniques such as Net Present Value, Internal rate of

Return and Profitability Index; were still being used when contemplating on

project appraisal. These techniques remained relevant despite the challenges

caused by hyperinflation.

The company had a solid training foundation in terms of how the macro-

economic environment was affecting the organisation with particular interest

in the finance department however there was a section of supervisors whom

didn’t afford the chance to attend such workshops. .

5.2 Recommendations

The researcher recommends that;

The Executive Procurement Committee (EPC) be continually in place to

recommend and manage projects and should be responsible for the funds

relating to the project. The EPC should manage the funds; source the

required funds in time, investing any excess funds to counter the negative

effects of inflation. Investment in steady foreign currency is essential when

hedging.

If the prices of outputs and the discount rates are expected to rise at the same

rate, capital budgeting decision will not be neutral Delta management should

raise the output price above the expected rate of inflation. Unless it has lower

Net Present Value which may lead to forego the proposals and vice versa. If

the company is unable to raise the output price, it can make some internal

42

adjustments through careful management of working capital. With respect of

discount rate, the adjustment should be made through capital structure.

The Finance department should ensure that the project be implemented as

per planned financial projections and ensure project budgetary control.

The organisation should educate their management especially supervisors on

capital budgeting in an unstable environment and this can be done through

the engagement of experts who are at disposal from within firm and even

external consultants. Management should have an in-depth knowledge of

these basic elements in capital budgeting. A continuous series of workshops

keep management up to date.

5.3 Summary of the research

The study was on the impact of inflation on capital budgeting decisions particularly

concentrating on Delta Beverages Masvingo Sorghum. Chapter one introduced the

study and laid out the statement of the problem, the hypothesis and the objective of

the research. Chapter two reviewed literature from expects highlighting their views

on the effects of an unstable environment on capital budgeting. Chapter three

revealed the methodology that was used by the researcher. Chapter four analysed

and presented the research findings communicating information gathered during the

investigation.

43

5.4 Conclusion

In view of the study’s findings, the hypothesis is that capital expenditure decision-

making is difficult to due to uncertainty caused by hyperinflation and related issues. It

is critical that capital budgeting be monitored for effectiveness to ensure it continues

to be an important financial measurement tool.

44

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Bailey, A and Jensen, D (1977), Financial Management 2nd Edition Prentice Hall,

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Cooper, D.R. and Schindler, P.S (2003). Business Research Methods 8th Edition,

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Copeland, B, (1992) Financial Theory and Corporate Policy, 3rd Edition, Addison

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Leedy, D. (1993). Practical Research, Planning And Design. 5th Edition Eaglewoods

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Mills G, (1996) Journal for Financial and Strategic Decisions Number 1, Volume 9

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Rappaport, A and Taggart R (1982) Financial Management 1st Edition, Wiley College

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Van Horne, J (1971). Journal of Financial and Quantitative Analysis Number 1,

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46

APPENDICIES

Appendix A

Questionnaire for Management (including supervisors)

Instructions

a) Do not write your name on the questionnaire

b) Show response by ticking the respective answer box where applicable and or filling

in the spaces provided.

c) If not certain of your response omit the question

1. Do you understand the relationship that exists between capital budgeting and aggregate

inflation?

YES NO

2. If your answer in 1 above is yes, what is your understanding?

______________________________________________________________________

______________________________________________________________________

3. State how you view traditional investment appraisal methods when used in an

inflationary environment?

______________________________________________________________________

______________________________________________________________________

___________________________________________________________________

47

4. How did hyperinflation affect capital budgeting efforts of the entity?

______________________________________________________________________

______________________________________________________________________

___________________________________________________________________

5. Did the Executive Procurement Committee (EPC) have someone who was well versed

with macroeconomics of the period in question?

YES NO

6. Were any workshops held or attended that related to financial management in a volatile

environment?

YES NO

7. How capable do you rate your finance team in executing capital budgeting calculations?

Bad Moderate Good

8. Did you face any challenges in making capital expenditure decisions? , give your answer

and state the reason below

______________________________________________________________________

______________________________________________________________________

___________________________________________________________________

48

Appendix B

Questionnaire for Finance

Instructions

a) Do not write your name on the questionnaire

b) Show response by ticking the respective answer box where applicable and or filling

in the spaces provided.

c) If not certain of your response omit the question

1. In your view was the finance team able to handle capital budgeting well in the

hyperinflationary environment?

YES NO

2. What variables did you consider important in working out capital expenditure figures?

______________________________________________________________________

______________________________________________________________________

__________________________________________________________

3. Did you attend workshops related to financial management in a volatile environment?

YES NO

49

4. What investment appraisal method did you use to evaluate capital projects in the

unstable environment?

______________________________________________________________________

______________________________________________________________________

__________________________________________________________

5. How accurate were your appraisal methods given the environmental volatility?

___________________________________________________________________

___________________________________________________________________

________________________________________________________________

6. How important is capital budgeting in the company?

___________________________________________________________________

__________________________________________________________________

7. Did the department recommend any capital expenditure activity in it period? YES

NO

8. If the answer is yes was expected return archived?

YES NO

For clarification and questions, please contact me on 0912 678 754

THANK YOU!!!

50

Appendix C

Interview Schedule

1. Define the term hyper-inflation in the macro-economic context.

2. Explain your understanding of the relationship that exists between capital budgeting

and aggregate inflation?

3. Did you use any traditional investment appraisal methods in the hyperinflationary

environment?

4. Give reasons for your previous answer?

5. What motivated the company to make investment decisions despite the uncertainty

caused by hyperinflation?

6. What investment appraisal method did you use to evaluate capital projects in the

unstable environment?

7. Of what importance is capital budgeting in your company?

8. In your view is the organisation ready to deal with capital budgeting in any

form of macro-economic instability?

51