Application of Investment Appraisal Techniques by Small and Medium Enterprises (SMEs) Operators in the Tamale Metropolis, Ghana

Abstract

The small and medium enterprise (SME) sector deficiency in adherence to best operational practices has been discovered to be one of the major causes of investment failures and the dwindling growth in productivity of the sector. Among these best operational practices that the SME sector is asserted to be deficient in practice is investment appraisal to predict investment profitability and success. Nevertheless, there are divergent findings of existing research works on whether SME operators practice investment appraisals or not. This research therefore examined the application of the basic Investment Appraisal Techniques (IATs) by SME operators in the Tamale Metropolis. The descriptive and referential research design technique was used. The simple random sampling technique was also used to collect data from 400 SME operators with the use of structured questionnaires. The data gathered was analysed with the use of SPSS tool to perform multinomial regression and Chi-square Test (X²) analysis. The research found that SME operators in the Tamale Metropolis had significant knowledge in the various basic IATs. There was also a significant application level of the IATs by the SME operators. Although the SME operators demonstrated significant knowledge and application level in the various IATs, it was discovered that they did not use the theoretical mathematical formulae of the IATs in appraising their investments. It was also discovered that operator’s knowledge in an IAT had insignificant influence on its’ application by the operator. The choice of the IATs by the SME operators was found to be significantly influenced by the SME Operator’s gender, educational level and risk behaviour and the investment size and the business or industry type. However, regulation or legal requirement was found to have insignificant influence on the choice of IATs by the SME operators.

Keywords: Investment Appraisal Techniques, discounted cash flow techniques, non-discounted cash flow techniques, Accounting Rate of Return, Capital Asset Pricing Model, Cost Benefit Analysis, Discounted Cash Flow, Expected Rate of Return, Internal Rate of Return, Net Present Value, Payback Period, Profitability Index, Return on Capital Employed, Value-at-Risk.

DOI: 10.7176/JESD/10-14-02

Publication date:July 31^st 2019