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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Item Type: Project Material | Size: 112 pages | Chapters: 1-5
Format: MS Word | Delivery: Within 30Mins.
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