Investment Appraisal in a Depressed Economy

Investment Appraisal in a Depressed Economy

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Chapter one on Investment Appraisal in a Depressed Economy

INTRODUCTION

BACKGROUND OF THE STUDY

Different school of thoughts on the reasons for the existence of a business organization. While some believe that profit in the sole reason for existence, other believe that a business exist in order to survive the vagaries facing the business and its owners. With proper evaluation of this school of thought, one would be persuaded to believe that the perceptions of this various schools of thought about the reasons for the existence of a business entity an be likened to the stony of the five blind men who were ask to inspect an elephant with each giving an account of the elephant with the perception of the area he could feel with his hands.

It is therefore with a view to creating uniformity in the perception of managers for the reasons for the existence of a business entity that the great management philosopher, Peter F. Drucker in his book “The nature of management” propounded eight reasons for existence of business entity. The reasons stated are;

i.        Profitability to make profit

ii.       Productivity: To produce consumable goods and provide essential services to its customer.

iii.      Innovation: To experiment and generate new ideas of production of goods and deliverance of services. 
iv.      Financial standing: To improve the liquidity status of the company at any point in time. 
v.       Physical resources: To ensure that the resources employed in the management of the organization are not only maintained but also under safe custody and made easily available for production. 
vi.      Workers attitude and performance:  The workers stand as on epitome of the organizational attitude hence polished manner and cheerful attitude is expected to win customers for the organization. 
vii.     Manager performance and development: The managers are the catalyst upon which the workers act and the enhanced performance of the manager would be testament to high motivation of he work force and invariably in proved productivity. 
viii.    Social responsibility: The business entities do not operate in a vacuum. Due to the fact that it obtain environment and simultaneously release output for consumption of its customers, then it has to be sensitive to the services of the environment in which it operates and this would amount to being socially responsible to its consumers and environs. 
Among the reasons given by Drucker one fact still remain glaring that for a business to exist, it has to stake its fund either within or outside he organization with the expectation of returns in order to meet up with the continuity or going concern objectives.   

WHAT IS INVESTMENT APPRAISAL 

The fact that the business entrepreneur states his money in ventures which would eventually yield returns for him places him in a position which means he has to be frugal in his spending and avoid frivolous spending which might eventually lead to the devise of the organization. Being frugal in his spending does not mean that the financial manager would be miserly in his outlook to spending but that the venture in which he would invest would improve the financial position of the organization can only be improved if the financial manager invest in projects that are profitable and avoid as much as possible loss bearing investments unless it improve the goodwill of the organization.

DEFINITION OF INVESTMENT APPRAISAL

It is the provision of information that will assist management in making of decisions concerning the investment of capital example includes: 
1.       Replacement decision 
2.       Investment for expansion 
3.       Investment for product improvement and/or cost reduction. 
4.       New venture 
5.       Strategic investment. 
Investment appraisal therefore is that technique devised by the financial managers as a yardstick for determining the profitability or otherwise of any venture he dabbles into.        

 OBJECTIVES OF THE STUDY 

The embankment of this area of study stems from an appreciation of techniques of investment appraisal and an innate desire to share the knowledge with those it might be useful to. The paramount objectives of the study could however be narrowed down to: 
i.      Reference material:  To provide a handy material on which other research students can fall back on for reference purpose. 
ii.      Discussion of Techniques: To bring into light those investment appraisal techniques that are in existence. 
iii.     Merit and Demerit:  To highlight the strengths and weakness of the various investment techniques. 
iv.     Knowledge acquisition: The dissertational affect is as well directed towards further expansion and acquisition of knowledge based on appraisal of investment 
v.      To lay fear of future managers who makes judgmental decision.  

SCOPE OF THE STUDY 

There seem to exist a limit less lists of researchable area on investment appraisal. An appreciation of this fact has however necessitated that restriction of the research work into an appreciable framework. The research effort is therefore narrowed down to: 
i.        The dissertation of the various investment appraisal techniques, which aids prudent decision-making. 
ii.       Te reviews of the various problems, which are likely to be encountered during investment appraisal. 
iii.      The establishment of variable investment opportunities. 
iv.      Effect of investment appraisal on the wealth of the shareholders. 
v.       Improvement of the existing investment appraisal techniques.

SIGNIFICANCE OF STUDY

The Nigerian economy is dwindling drastically as regard finance with the currency of the country, the Naira exchanging to the dollar at close to N100. A dwindle economy with a tint of political instability would naturally discourage flow of investment and a halt in the flow investment would lead to inflation and all its attendant symptoms which highlighted by a depressed economy. Therefore incumbent on the financial managers ensure that in a depressed like Nigeria, not only should  investment opportunities be sought but should also be critically appraised with other existing opportunities so that optimum use of the limited finance of the organization is achieved. 
The problem is not peculiar to Nigeria or the developing countries alone, the importance of investment appraisal is even more appreciated in developed countries where the ideas were passed down. This therefore the objective of this study to bring into lights the usefulness of investment appraisal.   

 LIMITATION OF THE STUDY 

The discussion of investment appraisal techniques in relation to this project work is from the adoption of the techniques by Cadbury Nigeria ltd. Other organization might possess more useful or even complex ways of appraising investments. Despite this constraint much effort will be exerted in trying to establish technique which may not necessary be applied by Cadbury Nigeria plc.

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