Capital budgeting methods: theory versus practice: the case of companies listed in Dar es Salaam stock exchange.

Capital budgeting decision is the company's decision to invest its funds most efficiently in the long-term investments in anticipation of an expected flow of benefits in future. The uncertainty of the future makes the benefits doubtful, therefore the need to employ best techniques available when analyzing investments. Literature on finance suggests there are acceptable methods the DCF methods and less acceptable methods the non-DCF methods that are used to evaluate investments. However empirical Studies on which methods are applied in making investments decisions show mixed findings. Furthermore, the use of DCF methods depend on cost of capital, however, the literature on cost of capital advocates that in some instance tile cost of capital of the firm or an investment may be used. Studies in the context of Tanzania to examine the application of these methods are few and were studied in the absence of capital markets. The objective of the study was therefore to investigate the practices of capital budgeting methods and the cost of capital in the presence of capital market. The sample of the study was 13 companies listed in DSE with business operations in Tanzania. The response rate was twelve companies, representing 92%. Descriptive statistics was used to analyze data and a T-test was used to test the hypotheses. Findings indicated that listed companies used combination of methods with the NPV being mostly used, followed by PBP, IRR, ARR, PI and real options and the cost of equity as the discount rate when making capital budgeting decision. The study recommended that: firstly, practitioners should use relevant theory rather than working out of traditions in capital budgeting decision, secondly, banks should objectively establish lending base rate and lastly, the DSE should strive to provide timely and reliable information to enable the capital budgeting practices to be done smoothly.