Capital Budgeting Decisions : Evidence from Banking Industry in Bangladesh

Abstract

Bank is the financial institution that commits funds today in order to receive a return in the future, where bank’s investment involves in the capital budgeting decisions. The researcher feels the difficulty to work and prepare paper on capital budgeting decision for banking business as the bank is the money sensitive organization and the capital budgeting is the crucial and critical decision. It is found by the analysis that an average investment of loan to client made by the bank at Profitability Index (Pl) = 0 results in the growths of profitability of bank that expand the pervasiveness of business result in large capital requirement and capital budgeting decision is used as a standard for decision making for banking organization like any other organizations associated with inflation effect in the capital budgeting analysis and Net Present Value (NPV) respond differently in inflation consideration and Net Present Value equals to zero at Internal Rate of Return (IRR) rate and Modified Internal Rate of Return (MIRR) rate and Net Present Value varies negatively with required rate of return. The analysis on bank, this paper also reveals that Internal Rate of Return lies over Modified Internal Rate of Return, Accounting Rate of Return (ARR) on Earning Before Interest and Tax (EBIT) is greater than ARR on net income, and the payback period and benefit vary negatively in respect of recovering investment of the bank’s project.