Capital investment appraisal: a comparison between theory and practice among Small and Medium Industries (SMI) in Malaysia / Nor Suhailati Abdul Manan, Eley Suzana Kasim and Saforah Abdul Rahman

Capital Investment decision is one of the most crucial decisions that a business organization must make in order to assure future survival and wealth of the business. The effect of the decision made can be very devastating. Therefore appropriate investment decision must be made in order to secure the interest of the shareholders and stakeholders of the business. Based on theory, capital investment opportunities should be appraised by use of discounted cash flow methods such as net present value (NPV) and internal rate of return (IRR). However, in real, what is being practiced by most SMI companies is inconsistent with the theory. They tend to use Accounting Rate of Return rather than Discounted Cash Flow methods. Larger SMI firms are catching up with the theory by implementing proper procedures in appraising the capital investment opportunities, while smaller firms are moving slowly towards the same direction.