PERCEPTION OF CAPITAL BUDGETING AS A TOOL FOR OPTIMUM INVESTMENT ANALYSIS A CASE STUDY OF SELECTED COMPANIES IN PORT HARCOURT

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:

       What will be the trend of technology?

         Will  supply  of  natural  resources  including  energy  and materials be adequate?

         Will government regulations and tax policies become more restrictive?

         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.

1.3    RESEARCH QUESTIONS

Question 1:         What   are   the   effects   of   capital   budgeting decisions on the corporate strategies and long term survival of companies?

Question 2:         What  are  the  effects  of  outsourcing  capital expenditure decisions of companies and consultancy firms to manage the company’s capital investment?

Question 3:         Are   capital   budgeting  techniques  applied  in making capital expenditure decisions in your country?

Question 4:         Given the strategic nature of capital expenditure decisions on company’s performance, are such decisions made by management?

1.4      OBJECTIVES OF THE STUDY

The objectives of this study are:

(a)    To determine the perceived impact of capital budgeting criteria on the performance of companies.

(b)    To determine the roles of management with respect to project appraisal.

(c)     To  determine  the  nature  of  capital  budgeting  decision making in companies.

(d)    To  study  and  analyze  capital  budgeting  practices  in companies.

1.5    STATEMENT OF HYPOTHESES

Our hypotheses for this study are as follows:

Ho1     Capital  budgeting  techniques  are  not  applied  in  making capital expenditure decisions.

HA1     Capital budgeting techniques are applied in making capital expenditure decisions.

Ho    Outsourcing capital expenditure decisions to professionals and consultancy firms do not produce better results

than when such decisions are taken internally.

HA2     Outsourcing capital expenditure decisions to professionals and consulting firms do produce better results than when such decisions are taken internally.

Ho3      Decision making model stages have not been adapted to incorporate capital investment decisions.

HA3   Decision making model stages have been adapted to incorporate capital investment decisions

Ho4      Capital   budgeting   techniques   have   no   effect   on   the corporate strategies and long-term survival of companies.

HA4      Capital budgeting techniques have effect on the corporate strategies and long-term survival of companies.

1.6    SCOPE OF STUDY

Our  study  covers  selected  companies  in  Port  Harcourt. Specifically, we limited our study to eight companies. The

study centers on the way and manner companies make capital expenditure decisions. Because company’s studies are subject to the same legal, economic and social factors as prevalent in other parts of Nigeria. Our conclusion also apply to other companies outside our area or study.

1.7    SIGNIFICANCE OF THE STUDY

The important of this research include:

(i)        It  provides  a  basis  for  understanding  the  concept  of capital budgeting decisions.

(ii)       It   highlights   the   problems   that   management   will encounter in making capital expenditure decisions and proffers useful suggestions.

(iii)    It  provides  useful  information  that  will  assist management to make sound decisions.

(iv)      Students offering financial and management accounting find this study useful at understanding capital budgeting as practical by companies.

(v)       It  also  highlights  how  companies  could  use  funds effectively and efficiently.

1.8    LIMITATIONS OF THE STUDY

Financial and time constraints actually worked against this study. They made it very difficult and formed major obstacles to

the smooth conduct of the work. As a result, we could not travel to other parts of the country to collect relevant data for the study.

The data collected and used in this study were from the eight companies  studied  in  Port  Harcourt,  River  State.  Therefore, findings contained in this study are based on the companies studied.

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