The Impact of Capital Budgeting in the Private Sector

The Impact of Capital Budgeting in the Private Sector

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Chapter One of The Impact of Capital Budgeting in the Private Sector

INTRODUCTION

BACKGROND OF THE STUDY

Every business firm normally will like to know how it perform over a period of time this leading to a preparation of profit and loss statement. They also ask about their position at a particular point in time, which lead them to the preparation of budget. A budget can be seen as a document or financial document used to project future income and expenses. In budgeting there are types of budget prepared by the firms, such as capital budget, sales budget and cash budget and so on. The process of preparing capital budget is called budgeting. Capital budget are long-term budget made for acquisition and expansion of fixed asset. Many firms prepares capital budget today, it was originated in the  United states of America (U.S.A). In America it was applied by all firms before the second world war. After the second World War many firm saw the need  to plan for capital expenditure, hence it is prevalence today. The Nigeria brewery limited and other beverage are not left  out in the train of firm that prepare budget for its capital expenditure. The process of capital budgeting is vital to any responsible, well managed business. if that business is public and owned by public shareholders, the budgeting process becomes more crucial, since shareholders can hold management accountable for accepting unprofitable projects that can have the effect of destroying shareholder value. The decision of whether to accept or deny an investment project as part of a company’s growth initiatives, involves determining the investment rate of return that such a project will generate. Capital budgeting is also vital to a business because it creates a structured step by step process that enables a company to develop and formulate long-term strategic goals, seek out new investment projects, estimate and forecast future cash flows, facilitate the transfer of information and creation of decision. Capital budget however is not easy as it is fought with a lot of problems.

STATEMENT OF THE PROBLEM

The main purpose of setting up a private firm is to achieve enough sale revenue that will cover the fixed and the variable cost as well as live some profit to justify its existence. The introduction of many economic measures after the year 1982 aim at revamping the nations economic comes with many problem with which the brewery industries are not left out.

1.       The problem of change in the demand of beer.

In order to produce, firms in the brewery industry including (The Nigeria brewery limited) acquire fixed assets as well as raw material. This acquisition is based on the expected demand. The demand of beer can not now be fairly estimated because of the general rises in the price. General rise in the price of beer has made the customers to shift their demand to other goods. These bring about decrease in the demand for beer. The uncertainty surrounding the continuance rate at which the demand of beer decrease has become of the problem encountered by the capital budget especially by the Nigeria breweries limited since the capacity of the production is always affected by the change in the demand of product.

2                   The problem of tariff and import restriction on the importation of fixed asset and the spare parts.

It has made the firm like the Nigeria brewery limited look of alternative way of obtaining fixed asset necessary for its production and operation. It often increased the price for them as a result of the import tariff restriction. The uncertain surrounding this has made capital budget a problem.

3.       The problem of appropriate selection of human factory which is the fidelity of the capital budgeting

4        The problem encountered in the external source of financing in its capital project.

The external source of financing included the commercial banks, trade     creditors and some financial institution. Banks and other financial institutions charges interest on the money that they lend out, interest charges fluctuated with the changes in economic setting. Due to the dynamic nature of the economic with consequent effect on the interest rate, it is problem making cost benefit analysis, necessary in the capital budgeting. The rate is never stable. The uncertainty include in this makes a problem for capital budgeting.

5.       Problems on knowledge of the techniques in project evaluation.

OBJECTIVES OF THE STUDY

The general objectives of capital budgeting are

1                   To determine the product scope, capital budgeting lets project planners define the financial scope of a project.

2                   To determine funding sources and how much money will be needed form each source and the costs associated with using that funding method.

3                   To control project costs, capital budgets act as control document throughout the life of the project.

4                   To determine payback time, an important element of capital budgeting is determining the project time.

                    While the objective of this study is to find out the following.

1                   To find out the extent to which capital evaluation techniques are used by the Nigeria breweries management in evaluating their projects.

2                   To find out whether evaluated projects will yield adequate return for the investors.

3                   To determine the factor that influence the selection of project to be invested in .

4                   To determine the extent in which evaluation of capital important in Nigeria budgeting.

5                   To find out if appropriate selection of human factory, is the fidelity of the capital budgeting.

RESEARCH QUESTION

The following questions have been formulated as a guide for this research.

1                   Do Nigeria breweries management use capital evaluation techniques in evaluating their project?

2                   To what extent does evaluated project yield adequate return for investors?

3                   What are the factors that influenced the selection of project to be invested in?

4                   To what extent is evaluation of capital project important in NBC budgeting?

5                   Is the appropriate selection of human factory the fidelity of the capital budgeting?

RESEARCH HYPOTHESIS:

The hypotheses of this research are stated below:

1        HO: Nigerian breweries managements does not use capital evaluation techniques in evaluating their project.

HA: Nigerian breweries management use capital evaluation techniques in evaluating their project.

2        HO: Evaluated project do not yield adequate return for investors.

HA: Evaluated project  yield adequate return for investors

3        Ho: There are no other factors which influence the selecting of project to be invested in

          HA: Ho: There are other factors which influence the selecting of project to be invested in

4        HO: Evaluation of capital is not important in Nigeria budgeting.

HA: Evaluation of capital is important in Nigeria budgeting.

5        Ho: Appropriate selection of human factory is not the fidelity of the capital budgeting

HA: Appropriate selection of human factory is the fidelity of the capital budgeting

SIGNIFICANCE OF THE STUDY

The outcome of the research work will be significant to the management of the Nigeria breweries Limited who is faced with capital budgeting decision problem. Furthermore, it will be significant to the investors who wish to invest in capital project.

Finally it will equally be important to other researchers and scholars who may wish to carry out further research on the subject matter or on the related topic.

SCOPE OF THE STUDY

The study will examine the capital budgeting techniques of the Nigeria breweries and will be able to establish techniques adopted by the firm stated in the theory. The study will also examine the extent in which evaluation of capital important in Nigeria budgeting and also whether evaluated projects will yield adequate return for the investors.

OPERATIONAL DEFINITION OF TERMS

CAPITAL BUDGETING: This is the long term plan made for production, necessary to buy fixed asset for the production of the goods and services.

Finance: This is the term used to donate acquisition and spending of fund to met an economic unit objective

Cash flow: This is the asset of long-term nature used in the production of goods.

Capital rationing: This is the allocation of scare capital resources among competing economically desirable projects, which cannot be carried out to capital or other constraint.

Ranking: This is the arranging of project in other of their viability with reference to the evaluation result.

Capital expenditure: This is the investment to acquire fixed or long-lived assets from which a stream of benefits is expected

Budget: This is the plan that is qualified in a monetary term

Private sector: This is the part of the economy sometimes referred to as the citizen sector which is run by private individuals or groups. 

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