Investment and Financing Decisions Criteria in Ethiopia: Under Condition of Uncertainty

Abstract

This article assesses and investigates the Criteria being used by Ethiopian Companies for accepting or rejecting investment or financing alternatives under the condition of uncertainty. To achieve this objective, a sample of respondents from 40 corporates was selected to obtain wide range of investment and financing decisions’ experiences in the country. Both Survey and in-depth interview techniques were employed. The findings of the study indicated that Ethiopian corporates use investment and financing decisions criteria only at the time of initial investment when they are forced by other bodies such as banks that extend loans to them. In such case, it was found that they use NPV, IRR, PI or PBP or their combination. The study revealed that companies in Ethiopia evaluate their projects almost entirely on the basis of the pure rate of return. However, the study also found that risk assessment and adjustment techniques such as sensitivity analysis, simulation analysis and decision tree analysis are rarely used in Ethiopia. Accordingly, the most and widely employed risk assessment technique was sensitivity analysis and the most common methods for risk adjustment are shortening of the payback period.

Keywords: Ethiopia, Investment Decision, Financing Decision, Decisions Criteria, Uncertainty.