Capital Budgeting Practices: The Case of Qatar

Abstract

The purpose of this project was to investigate the capital budgeting practice in the largest firms in Qatar. A survey was conducted of the 170 largest firms and corporations. A total of 55 completed surveys were received, for a response rate of 34 percent. The results showed that Qatari companies in general tend to adopt the discounted cash flow methods, with Net Present Value (NPV), Profitability Index (PI) and the Internal Rate of Return (IRR) being the most widely used methods. Capital asset Pricing Model (CAPM) including some extra “risk factors” was used to estimate the cost of capital in more than half of the companies. Companies tend to use the cost of debt plus some premium as the discount rate, and they frequently reviewed and adjusted that rate, mainly as to the expected changes in the project’s risk. The terminal value was commonly estimated using the present value of future cash flow in perpetuity and multiples of terminal earnings.