The Impact of Capital Budgeting in the Private Sector
OBJECTIVES OF THE STUDY
The general objectives of capital budgeting are
- To determine the product scope, capital budgeting lets project planners define the financial scope of a project.
- To determine funding sources and how much money will be needed form each source and the costs associated with using that funding method.
- To control project costs, capital budgets act as control document throughout the life of the project.
- 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.
- To find out the extent to which capital evaluation techniques are used by the Nigeria breweries management in evaluating their projects.
- To find out whether evaluated projects will yield adequate return for the investors.
- To determine the factor that influence the selection of project to be invested in .
- To determine the extent in which evaluation of capital important in Nigeria
- To find out if appropriate selection of human factory, is the fidelity of the capital budgeting.
capital budgeting originated from the united state of 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.
Capital expenditure is any significant expenditure incurred to acquire or improve land, building, engineering structures, machinery and equipment. It normally confers a benefit lasting beyond one year and results or the acquisition of extension of the life of a fixed asset. Capital budgeting in
Making decisions have significant future benefits or cost or various entities and their stakeholders.
Capital budgeting is a multi-year financial plan, usually five or ten years for the constructions or acquisition of capital work. The plan, once complete, should provide for the planning of future financial resources required to finance the project, identify the future financial resources to allocate from the operating (revenue fund) budget to operate and maintain the capital asset once it is acquired and integrated with Nigeria breweries on going management control system.
Capital budget is distinguished from an operating budget. An operating budget normally provides for the day to day expenditures of Nigeria breweries, for items such as salaries, wages, benefits maintenance of building and infrastructure etc. while capital budget plans for the acquisition or rehabilitation of capital assets.
MEANING OF CAPITAL BUDGETING
Capital budgeting is long-term planning for making and financing proposed capital out lays, it is concerned with allocation of the firms scarce financial resources among the available market opportunities. The considerations of investment opportunities involve the comparison of the expected future streams of earnings from a project with immediate and subsequent streams of expenditure for it.
FEATURES OF CAPITAL BUDGETING
The important features, which distinguish capital budgeting decision in other day to day decision, are:
- Capital budgeting decision involves the exchange of current funds for the benefits to be achieved in future
- The futures benefits are expected and are to be realized over a series of years.
- The funds are invested in non-flexible long-term funds.
- They have a long term and significant effect on the profitability of the concern.
- They involve huge funds.
- They are irreversible decision
IMPORTANCE OF CAPITLA BUDGETING
The importance of capital budgeting can be understood form the fact that an unsound investment decision may prove to be fatal to the very existence of the organization. The importance of capital budgeting arises mainly due to the following.
- Large investment: Capital budgeting decision, generally involves Large investment of funds. But the funds available with the firm are scarce and the demand for funds exceeds resources. Hence, it is very important for a firm to plan and control its capital expenditure.
- Long-term commitment of Funds: Capital expenditure involves not only large amount of funds but also funds for long-term or permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision.
- Irreversible nature: The capital expenditure decisions are irreversible in nature. Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to dispose off the assets without incurring heavy losses.
- Long=term effect on profitability: Capital budgeting decision has a long-term and significant effect on the profitability of a company. Not only the present earning of the firm are affected but also the future growth and profitability of the firm upon the investment decision taken today. Capital budgeting has utmost importance to avoid over poor under investment in fixed assets.
- National importance: Investment decision though taken by individuals concern is of national importance because it determines employment, economic activities and economic growth.
TYEPS OF CAPITAL BUDGETING DECISION
There are many ways for classifying investment. One of the classifications according to Benjamin C. Osisioma (2000) is as follows:
1 Replacement: Decision necessary to replace worn-out or damage equipment fall in the group. The purpose of such investment decision is to lower maintenance cost, minimize the decision to lower the maintained cost, minimize the marketing cost and labor cost and other variable cost item like the electricity bill.
2 Expansion of the existing product or market: Included in those categories is the expenditure to increase the output of the existing products or to expand outlet of the existing products or top expand outlet or the distribution facility in marketing new product being selected.
3 Environmental Safety Regulation: This involves expenditure necessary for the compliance with the government regulation, labour union requirements and the condition of the insurance policy. . This are usually referred to as mandatory investment and non-revenue yielding project.
4 Miscellaneous expenditure: These include expenditure on office building, packing lost and similar cash outlays based on the interrelationship among proposed project.
Benjamin C. Osisioma (2000) further classifies investment decision as;
- Independent projects: This exists when acceptance or the rejects of the project does not affect the cash flow of another project. In other words, proposed budget save different purpose and do not compete with each other.
- Dependent Projects: This is the reverse of the independent projects, it occur whenever the cash flow of a project affects or is influence by the cash flow of another project and may appear in the following situation.
- Mutually exclusive project: If the acceptances of one project include the acceptance of another project. The two projects are mutually exclusive project.
- Complementary projects: If the acceptance of one project enhances the cash flow of another project. The two projects are complimentary.
- Prerequisite of contingent project: If the acceptance of one project depends upon the prior acceptance of another project, the acceptance of the former is the prerequisite to the acceptance of the latter.
- Mandatory project: This is the project that must be accepted if the firm must remain in the business. The telephone manufactured the receiver, cable and other component parts.
- Discretionary Project: These are project that are acceptable only if they are financially attractive
Survey design was considered appropriate for the research work because of the nature of information needed for the study. The study sought the opinions of management accountant and the accounting unit of the Nigeria breweries to know the extent / degree to which capital budgeting evaluation techniques are used by Nigerian breweries in evaluating the capital budgeted projects.
AREA OF THE STUDY
This research work was carried out at Nigeria breweries Plc Enugu in Enugu North Local Government Area of Enugu State.
POPULAITON OF THE STUDY
The population of this research covered all the departments of Nigeria breweries Plc Enugu. While the accessible population 15 fifty (50) which covers the management accountant and the accounting unit. They all gave useful information to this research work.
DATA PRESENTATION AND DISCUSSION OF THE FINDINGS
The simple percentage method of analysis was used to analyze data collected form both primary and secondary data. Under the percentage method the factor that has the highest percentage is the factor of higher importance. It is stated that out of the thirty (30) questionnaires administered to the management, twenty (20) were returned. It contains the summary of response from interview and role of each question.
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