Empirical Evidence on the Discrepancy Between Capital Budgeting Theory and Practice: A Survey of Estonian Enterprises

Abstract

This study examines investment project appraisal practices in Estonian firms using survey data from 106 companies. The results show that although more than half of the respondents frequently use at least one method recommended by financial theory such as NPV, IRR, or ROV, firms often rely on intuition or simpler evaluation techniques including the payback period and ARR, particularly when assessing smaller projects. Investment appraisal is typically based on pre-tax cash flows, and a non-negligible share of firms fail to correctly incorporate the effects of opportunity costs, sunk costs, and inflation. Overall, the findings support prior evidence that capital budgeting practices in larger firms are more closely aligned with financial theory.