TABLE OF CONTENTS
Background of the study
Statement of the problem
Aims and objective of the study
Research hypothesis statement
Significant of the study
Scope and limitation of the study
Definition of the terms.
History of vital foam Nigeria plc Lagos
Basic investment appraisal technique
A review of past studies
Risk and uncertainty
Capital investment appraisal under
Measure of risk
Determination of sample size
Population of the study
Data collection method
Validation of the instrument
Choice of statistical analysis
Re-statement of research hypothesis
design and administration
of the research
Data presentation and Data analysis
Presentation, analysis of data
Test of hypothesis
5.0 Summary, conclusion and recommendations
1.1 BACKGROUND OF THE STUDY
Capital budgeting is
the process by which the financial manager decides whether to invest in
specific capital projects or assets. In some situation, the process may entail
in acquiring assets that are completely new to the firm. Other situations,it
may mean replacing on existing absolete asset to maintain efficiency. During
the capital budgeting process answers to the following questions are sought.
What project are good investment
opportunities to the firm?from this group which assets are the most desirable
How much should the firm invest in each
of these assets?
OF CAPITAL BUDGETING
Initial investment outlay: it includes
the cash required to acquire the new equipment or bold the new plant less any
net cash proceed from the disposal of the replaced equipment. The initial
outlay also includes any additional working capital related to new equipment.
Only changes that occurs at the beginning of the project are included as part
of the initial investment outlay. Additional working capital needed or no
longer needed in a future period is accounted for as a cash outlay or cash in
flow during that period. Net cash benefits of savings from the operation.
This component is calculated as under:
(The incremental change in operating revenue minus the incremental change in
the operating cost= Incremental net revenue) minus (taxes) plus or minus
(changes in the working capital and other adjustments)
Terminal cash flow: it includes the net
cash generated from the sale of asset, tax effects from the terminal of the
asset and the release of net working capital. The net present value technique,
although these are several methods used in capital budgeting, the Net present
value technique is more commonly used under this method a project with a
positive NPV implies that at is worth investing in.
All business decisions involved a choice
among alternative courses of action. The criteria for such choices may be
subjective, such as attitudes of employees or the may be objective such as
dollars/ Naira of cost and revenue.
Most decisions are influenced by a
combination of both subjective and objective factors. In most situations, it as
possible to analyze some of the consequence of alternative actions in quantiitative
terms and to use the result of the analysis an making a decision. If two
alternative actions are under consideration, quantitative analysis will
generally show which actions will lead to the higher profit or if an investment
return on investment may be expressed as the ratio of income per period to the
average investment for the period to the average investments for the period.
Since income change either in revenue or in cost is relevant to the decision.
If a decision involves a new investment that will be recovered through
increased net revenue or cost savings over a period of several years, an
analysis of cash flows overtime is present value computation outline of an
alternative choice problem is formulated through the following steps.
Defined the problem and identify the
alternative solution to be considered
Measures and compare the consequence
of each alternative,in so far as these consequences can be express
Evaluate the subjective factors and
considered the extent to which they offset quantitative considerations
Arrive at a decision
Perhaps the most
common alternative choice problem involves decision for replacement of plant
assets or expansion of productive facilities. The process of planning and
evaluating proposals for investment in assets is called CAPITAL BUDGETING.
Capital budgeting is complicated by the
fact that the decision must be made for estimate of future operating result
which by their nature involve a considerable degree of uncertainty. Yet these
decisions are crucial to the long-run financial health of a business
enterprise. Not only are large amount of money committed for long period of
time, but many capital budgeting decisions are difficult or impossible to
reverse once the funds have been committed and their projects as begun. Thus
companies may benefits from good capital budgeting decisions and suffer from
poor ones for many years.
Many non-financial factors are
considered in making capital budgeting decision e.g. many companies give high
priority to creating jobs and avoiding layoffs. However it is also essential that investments in plant
assets earn a satisfactory return on the fund invested. Without this return,
investors will not be able to generate sufficient funds for future investment
Capital budgeting is a broad field
involving many sophisticated techniques for evaluating the financial and
non-financial considerations capital expenditures differ from day to day
revenue expenditure because of the following.
The involve large outlay
The benefits will accrue over a long
period of time, usually well over one year and often much larger, so that the
benefits cannot all be set against costs in the current year’s P and L account.
They are very risky
They involve irreversible decision
According to oye
Akinsulire (2005): capital budgeting involves all investment tin long-term projects. It is the process of selecting
alternative long term investment opportunities i.e. It is the process of
committing the company’s fund into long term projects. These projects would
normally have life spans exceeding one accounting period. The procedures
involved in capital budgeting decisions are as follows:
Identification of possible projects
Evaluation of projects
Authorization of projects
Monitoring and control of projects
A very important part
of a management accounting job is to provide information will assist the making
decision concerning the investment of capital funds. This is the process known
as capital budgeting.
Hence, we need to evaluate every
investment proposal to use if it is viable or not. In making such decision,
analyst must be very careful because capital budgeting usually involves a lot
of money and cannot be spent in an haphazard way.
1.2 STATEMENT OF THE PROBLEM
and invent managers are faced with so many problems and do not have absolute
authority in discharging their responsibilities their actions are constrained
by certain factors beyond their control.
There are two distinct factors which
exert very string influence over budgeting decision making process individual
and corporate investors carrying out their investment business in line with the
legal framework and in confronting with the nations economy.
Therefore, there are internal
environment which refers to internal structure of the firm and those that
exists that is external environment. The internal environment addressed the
inadequacy of human resources as one of the most principals factors where as
the external environment includes factors such as the political economics
cultural, social, legal and technological framework within which the firm
operates. Capital budgeting decisions are further compounded by the high rate
of inflation in Nigeria
economy, the nature and size of the projects in question and decision maker is
the value judgment and his skill and expertise as well as liquidity constraints.
The research shows among other things
that capital budgeting techniques are very vital and important in
organizational flexibility, profitability, applicability and reliability in
1.3 AIMS AND OBJECTIVES OF THE STUDY
The aim of this
research is to under study the capital budgeting decision in manufacturing
company taken vital-foam Nigeria plc, as the case study.
To achieve the above aims therefore, the
following objectives will be taken into consideration.
reveal the risks and uncertainty inherent proposal
determine the profitability of an investment proposal
determine factors affecting capital budgeting decisions
reveal other quantitative factors affecting capital budgeting decisions.
determine whether the investment is worthwhile undertaking or not.
1.4 RESEARCH QUESTION
In the course of this
research study the respondents will be able to answer to these questions.
What are capital budgeting decision?
Why and how does manufacturing company
get involved in capital budgeting decision?
Is there a consensus in the choice of
capital budgeting evaluation or appraisal techniques in manufacturing company?
how do the manufacturing concerns acquire
data relevant for capital budgeting decision making?
What role does uncertainty play in
1.5 RESEARCH HYPOTHESIS
In order to arrive at
logical conclusion on this research study the following hypotheses will be
1. Hi: Capital
budgeting decision has no significant influence on the success of an investment
Ho: Capital budgeting decision has significant influence on the success of an
2. Ho: Capital
budgeting decision is not indepednet on the relevant data acquired
budgeting decision is independent on the relevant data acquired
1.6 SIGNIFICANT OF THE STUDY
It has been
established that capital budgeting decision are inevitable due to their effect
on effectiveness and efficiency in manufacturing company in Nigeria
business. This study is attempt towards achieving its aims stakeholders will
then be at an advantage to make reasonable and rational decision based on the
finding conclusion and recommendations of the study.
1.7 SCOPE AND LIMITATION OF THE STUDY
This work focuses on
medium long term investment. It is in this regard phrase “capital budgeting
decision we carefully chosen. Again, consideration will be limited to only
select manufacturing company. It will however cover firm directly engaged in
converting raw materials of any form to usuable forms.
Sample company shall be drawn from manufacturing
concerns in Lagos
Capital budgeting decision is a top
management function officers at this level may be very busy and unwilling to satisfactory
complete and return the questionnaires. Other problems that would likely face
during the course of this study area in the area of time. Funds and
geographical distance in collecting data and information from sample and chosen
manufacturing concern location.
1.8 DEFINITION OF THE TERMS
budgeting: Is the process of planning evaluating proposals
for investment in plant assets.
rate: is the required rate of return used by an
investors to discount future cash flows to their present value.
value: Is the excess of the present value of there net
cash flows expected from an investment over the amount to be invested. NPV is
one method of rangking alternative investment opportunities.
period: is the length of time necessary to recover the cost
of an investment through the cash flows generated by that investment. PSP is
one criterion used in making capital budgeting decisions.
value: Is the amount of money today which is consider
equivalent to cash in flow or out flow expected to take place in the future.
The present value of money is always less then the future amount since money on
hand today can be invested to become the equivalent of a larger amount in the
cost: is a cost which should be given consideration in
making a specific decision.
is situation in which an event or activity is not likely to happen or occur.
This is very vital element in capital investment decision.
term assets: These are the assets which affects the
firm’s operation beyond the one year period.
index: The profitability index or benefit/ cost ratio of
a project is the present value of future net cash flows over the initial cash
outlay. Simply put present value of inflows over the present value of outflows.
payback period: The principles and decision rules are
the same as in the normal pay back period method, the only difference, is that
the cash flows to be used are discounted at the given or appropriate cost of
exclusive project: these are project that are to be
appraisal for acceptance/ rejection solely on each project’s individual merit.
rate of return: The internal rate return or yield for
investment is the discount rate equates the present value of the expected cash
outflows with the present of the expected inflows.
cost: that is historical cost, it represents a amount
that has already been incurred prior. To the investment under consideration
e.g. research and development (where already incurred), preliminary expenses
etc. it should be considered irrelevant
is an accounting derivation and does not involve the physical movement of cash
as such should be disregarded.
decision: This involves the identification of viable
projects i.e. it deals with appraisal of projects using various techniques to
determine those that are viable.
is defined as the maximum contribution that is forgone but using limited
resources for a particular purpose. An alternative way of describing
opportunity cost is as the value of a benefit sacrificed in favour of an
alternative course of action.
a situation in which we do not know exactly the performance of the future
uncertain events but we can qualify the possibilities of such future event.
decision: this involves the identification of the
appropriate sources of finance that would be used to finance projects.
decision: Here attention is focused on the compensation required
by the providers of funds i.e. this is the determination required of the
appropriate amount to be paid as dividend and the profit that would be ploughed
back to finance expansion in the company.
of vitafoam Nigeria
foam Nigeria plc was incorporated in Nigeria as a private company on 4th August, 1962.
The company was established to manufacture foam products having liquid later
base such as molded mattresses, cushions pillows and upholstery sheeting.
first factory was opened at Ikeja in 1963 for the production of latex foam
mattresses and cushions. This type of foam was later superseded by the
development of polyurethane foam and in 1966.the company installed its fist
urethane foam production plant at the Ikeja premises later, the manufacture of
carpet unclerlay, fiber pillows, rigid urethane insulating material and vital
bond adhesive etc were added to its operations.
The company has
acquired a high manufacturing capability through the support in the form of technology,research
and development from vital international limited, UK Vita foam manufacturing
locations are strategically spread across the country in order to make its
range of products easily accessible. Thus, in addition to the Ikeja factory,
which has been extensively enlarged, there are now four other manufacturing
loations in ABA,
JOS, KANO and
SAPELE. The company head office is located at the Ikeja factory on Oba-Akran
raod Ikeja. The sapele factory is involved with the production of rigid
polyurethane foams which are used for insulation purposes in the oil and gas
industries cold room construction refrigerated vehicles etc.
1.10 ORGANIZATION OF THE STUDY
This research will be
divided into five chapters; each chapter contains the following.
Chapter one will contain the background
of the study, statement of the problem, aim and objective of the study research
question, research hypothesis statement significance of the study, scope and
limitation of the study. Definition of the terms, history of vital foam Nigeria
Chapter two of the project is the Literature
review, which shall look into the basic investment appraised techniques. A
review of past studies, the theoretical frame work, capital budgeting, risk and
uncertainty, capital investment appraisal under uncertainty and lastly the
measure of risk.
Chapter three of the research work will
be the research design determination of sample size, population of the study,
sampling method, the data collection method, validation of the instrument,
choice of statistical analysis re-statement of research Hypothesis, the
questionnaire design and administration, data analysis techniques and lastly
the limitation of the research.
Chapter four of the project will be the
presentation analysis of data.
Chapter five will discuss the summary,conclusion
and recommendations of the research work.