Navigating Capital Budgeting Dilemmas: Theory Versus Practice at Clarence Infra Projects Ltd

The case study explores the capital budgeting challenges faced by Clarence Infra Projects Ltd, a company deeply committed to maximising shareholder value while navigating the complex world of capital investments. Despite their dedication to value maximisation, the company sometimes made decisions that contradicted this principle due to practical considerations. These contradictions highlight the real-world complexities of decision-making and the need to balance theory with pragmatism. The study presents three investment choices: solar power expansion, wind farm development, and hydroelectric power plant, each with distinct cash flow patterns. The managers traditionally used the payback period method, but they also employed the discounted cash flow methods, including net present value and internal rate of return, to evaluate the projects. Sensitivity analysis under various reduction scenarios is conducted to assess the resilience of the projects. Ultimately, the case highlights the importance of aligning financial theory with real-world complexities to make informed investment decisions.