ABSTRACT
Capital investment decisions are that decision that involves current
outlays in return for a stream of benefits in future years. The distinguishing
future between short-term decision and capital investment (long-term) decision
is time. The objective of this study is the applications of capital budgeting
patterns to enable the management of companies make credible investment
decisions in areas like:
Determining which specific investment projects the firm should accept.
Determining the total amount of capital expenditure that the firm should
undertake and determining how this portfolio of projects should be financed.
As for the methodology, questionnaires were distributed to eight (8)
companies in Port Harcourt. A total of 10 questions were proposed in the questionnaire
to enable us carry out the study. The findings are as follows:
That capital expenditure decisions made by companies have greater impact
on their long-term operations and survival.
That company employs professional financial manager to manage their
capital investment activities.
That companies employ appraisal techniques in making capital budgeting
decisions, particularly, the net present value technique, and, That management
of companies is responsible for all capital expenditure decisions and also
authorizes such expenditure. Recommendation of computerization, application of
DCF, adequate planning and control of capital budgeting decisions and training.
My suggestion is that if all the recommendations will be adapted, it
will enhance good decision making on capital budgeting.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF STUDY
When a company identifies an investment
opportunity, the company will not immediately commit funs into that line of
investment. All the factors, both internal and external, must be critically
analyzed before making any decision. In making investment decisions, the cost
of capital should also be considered. This therefore, requires adequate
planning on the part of management of companies. To make sound investment
decisions, companies employ more modern and sophisticated quantitative method
as linear programming, Critical Path Analysis (CPA), Program Evaluation and
Review Technique (PERT), Stock Control Model (EDQ), etc. The use of these
quantitative models results in better investment decisions. This is to enable
the management of companies to effectively and efficiently use scarce resources
in achieving their objectives.
But one major area that tends to determine
the colour and dimension of a company’s survival is that which related to
capital budgeting. That is the decision to acquire fixed assets for the operations
of companies. This is the must difficult aspect considering the fact that such
decisions are irreversible once they are embarked upon. Ordinarily, it would
have been so straightforward like the decision to buy a motorcar. Capital budgeting goes beyond that because the fixed assets to be acquired would
be used for a long time. The decision to acquire fixes assets is very important
to the realization of the objectives of a company.
Whether a company operates in the
manufacturing or service industry, fixed assets are very important to its
operations. The acquisition of such fixed assets as land and building, plant
and machinery, furniture and fitting, etc. will certainly impact on the
performance of a company. These are long-term assets and require huge financial
outlay on the part of a company. In order to make better and sound capital
budgeting decisions, appraisal techniques are usually employed by companies. As
a result of the strategic nature of such decisions, management of companies
take active participation in making such decisions.
In making capital budgeting decisions,
management of companies always makes reference to the goals and objectives of
the companies. Even though business enterprises are organized with the aim of
making profit, the goals of a private company may not be clear. In large
companies, most shareholders can effectively exercise their powers by selling
their stocks when their companies performed very badly. Consequently, the
management of a company may set goals that may include prestige, power,
security, and continuity of the organization. However, the most specific
objectives guiding the transactions of a company are:
1.
Maximizing profits
2.
Maintaining the market position
3.
Stabilizing company’s structure with regard to
assets and liabilities
4.
Expansion
Because companies operate within defined
areas, government impose certain regulations and tax laws. These limitations
allow the government some elements of control over the activities of the companies
in the economy. Before committing the resources of a company into new areas of
investment, the dominant factors that may affect the marketing of the products
or services must be considered.
Capital investment decisions involve a high
degree of risk. The need for careful planning and management of capital
budgeting decisions is very important. Since cash flows from such investments
are tied to the future, the risk level is on the high side. Because the future
is not easy to predict, it becomes imperative to address such questions as:
v
What will be the trend of technology?
v
Will supply of natural resources including
energy and materials be adequate?
v
Will government regulations and tax policies become
more restrictive?
v
What will be the social value that may influence
the manufacturing or provision of services and making demand?
These are important questions that affect capital budgeting decisions.
They all have future dimensions because they are tied to the nature. A critical
analysis of these future trends will serve the purpose of making sound capital budgeting decisions by companies.
This underscores the need for companies to employ appraisal techniques to
enhance their capital budgeting decisions. This study looks at how capital
budgeting techniques could be employed to assist management of companies make
sound investment decisions.
1.2 STATEMENT
OF THE PROBLEM
As a result of high level of risk and uncertainties inherent in capital
expenditure decisions, it has become imperative for management of companies to
critically analyze the intervening factors. The decision to acquire fixed
assets is a very difficult management exercise. A good investment decision
opportunity could turn out to be a pathway to suicide if a company fails to
plan and make adequate capital budgeting decision. This has been a major cause
of failure of companies in Nigeria.
To a large extent, political, social,
economic and technological variables direct the outcome of capital budgeting
decisions by companies.
These variables have far reacting influence
on capital budgeting decisions as they are beyond the control of the decision
maker. The employment of capital budgeting techniques is to minimize the effect
of these variables and ensure sound decisions. The problem we intend to address
in this study is directly related to capital budgeting.....
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