CAPITAL BUDGETING IN THE PRIVATE SECTOR

(A CASE STUDY OF THE NIGERIAN BREWERIES)

ABSTRACT
Capital budgeting involve basically the estimation of the cash flow, estimation
of the expected cash return and application of evaluation techniques in making
investment decision.
This study looked into the extent to which the Nigerian breweries do
carry out proper evaluation of capital project before making their investment
decision as well as the extent in which other factors are consider in the decision
process.
The study wills assertion the extent to which capital budgeting
evaluation techniques are used by the Nigerian breweries in evaluation the
capital budgeted projects. nd consider whether well!evaluated project will
yield adequate return for investors as well as the other factor, which influence
the selection of the project to be invested in.
"
#n arriving at my conclusion, interview were conducted and statistical test such
as the chi!square were used in analy$ing data collected at the course of the
study.
%esult of the study show that the evaluation of the capital project by the
management of the Nigerian breweries is not normally carried out effectively
before making their investment decision and that a well evaluated project will
normally yield an adequate return on investment.
&ased on the findings, some recommendation has been put forward for
consideration in chapter five.
TABLE OF CONTENT
Title page
pproval page
'edication
cknowledgement
bstract
Table of content
CHAPTER ONE:
"." #ntroductions
(
".( )tatement of the problem
".* +bjective of study
"., )ignificance of study
".- )tatement of the hypothesis
".. )cope of the study
"./ 'efinitions of terms
CHAPTER TWO:
(.0 %eview of the related literature
(." 1eaning of capital budgeting decision
(.( #mportance of capital budgeting decision
(.* Types pf capital budgeting decision
(., 2roblems
(.- nalysis of capital project
(.. 'eterring the cash flow
(.3 Techniques used in capital budgeting decision
(.3." 2ayback method
(.3.( Net present value
*
(.3.* #nternal rate of return
(.3., ccounting rate of return
(./ %anking of investment proposal
CHAPTER THREE
*." %esearch design and methodology
*.( )ource of data
*.* 2rimary
*., )econdary data
*.- )ample used
*.. 1ethod of investigation
CHAPTER FOUR
,." 'ata analysis and interpretation
,.( 'ata presentation and analysis
,.* Test of hypothesis
CHAPTER FIVE
,
)411%5, 6#N'#N7), C+NC84)#+N N' %9C+119N'T#+N
-." )ummary of the findings
-.( Conclusion
-.* %ecommendation
BIBLIOGRAPHY
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CHAPTER ONE
INTRODUCTION
9very business firm normally will like to know how it perform over a period of
time thus leading to a preparation of profit and loss statement. They also ask
about their position at a particular point in time, which lead then to proper
balance sheet. 6inally they will like to know where they are leading which led
to the preparation of budget.
&udgeting is a term that used by long man. 8ong confused budgeting with
planning. a beget is part of a plan. plan can be expressed in monetary and
non!monetary terms. ny plan that is qualified in a monetary term is a budget .
-
a bugeti therefore can be succinctly define as a statement of intention qualified
in monetary terms.
#n budgeting there are types of budget prepared by frims . such budget include
capital budget, sale budget, 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. 1any firms prepares capital
budget today. #t was originated in the united state of merica =4.).> in
merica it was applied by all firm before the second war. fter the second war,
many firm saw the need to plan for capital expenditure, hence it is prevalence
today.
The Nigerian brewery limited and other beverage are not left out in the train of
firm of firm that prepare budget for its capital expenditure. This is however not
easy as it is fought with a lot of problem.
STATEMENT OF PROBLEM
The main purpose of setting up a private firm is o archive enough sale revenue
that will cover the fixed and the variable cost as well as live some profit top
justify its existence. Nigerian brewery limited being a private enterprise
.
involves a brewery beer has the objective of making big huge profit. &rewery
all over Nigeria witness heavy rerun on their investment due to the expert of
their product to neighboring frican countries as well as the high consumption
rate of beer in the country. This was before the year "?/(.
The introduction of many stringent economic measure after the year "?/( aim
at revamping the nations live economic brought with many problem with
which the brewery industries is not left out. #n the order to produce, firm in the
brewery industry =@ including the Nigerian brewery limited> acquire fixed asset
as well as raw material. This acquisition is abased on the expected demand.
The demand for beer cannot now be fairly estimated because of the general
rises in the price. 7eneral rise in the price of beer has made the consumers to
shift their demand to other goods as necessity thud decreasing the demand for
beer. The uncertainty surrounding the continuance the rate at which the
demand for beer decrease has become of the problem encountered by the
capital budget especially by the Nigerian breweries limited since the capacity
of production is always affected by change in the demand of the product.
part form the capital budgeting problem caused by the uncertainty in the
change in the demand, there is also a problem of tariff and import restriction on
3
the importation of fixed asset and the spar parts. The singular problem has help
in no small measure in fuelling the height of the problem encountered by the
firm. #t has also made from like the Nigerian breweries look for alternative way
of obtaining fixed asset necessary for its production and operation. 9ven when
this fixed asset are source from the , it often increased the price for them as a
result of the import tariff restriction,. The uncertainty surrounding this has
made a ca0tial budget problem.
#ncrease in price for fixed asset as a result for import restriction and the small
nature of the financial capacity had made firm like the Nigerian breweries
limited t rank the project hey wish to embark on. . #n encountered in the
selection of the project of the human problem in the organi$ation, which is to
be embark upon. There is always problem of appropriate selection that will be
peculiar to a given project. s encountered in the project is the selection of
human factor, which is fidelity of the state of mind of the individual in charge
of the capital budgeting. &ecause of the small nature of the financial ability.
Nigerian brewery limited took to external source of financing in its capital
project. The external source of financing include the commercial bank, trade
creditors. nd some financial institution. &ank and other financial institution
/
charges interest on the money that they lend out. #nterest changes fluctuated
with the changes in the economic settings. 'ue to the dynamic nature of he
economy with consequent affect on the interest rate, it is problem making cost
benefit analysis necessary in the capital budgeting.
9ven when the able problem are solved to a great extent their remain the
problem obtaining foreign exchange necessary to remit the exporters change
rate. The rate is never stable. The uncertainty included in this makes a problem
for capital budgeting.
PURPOSE OF THE STUDY
The purpose of the study were to find out the following
". scertain the extent to which capital evaluation techniques are used by
the Nigerian breweries management in evaluating their projects
(. scertain whether well evaluated project will yield the adequate return
for the investor
*. 'etermine the other factor, which influence the selecting of project to be
invested in.
,. The capacity of the budgeting process in the Nigerian brewery limited
?
SIGNIFICANCE OF THE STUDY
lot of factor makes capital budgeting very important in the productive
and the commercial fair of any economy. This factor include lose of
flexibility. )ome of the information on this were taken form essential of
management finance by A.C Bilson and 9. &righton. fter the
commitment of fund to project, the relationship between asset expansion
and sale proper phasing the availability for the capital asset and the quality
of the asset purchased, satanically expenditure on which fund are not
automatically available and the failure of a firm as a result of too little
equipment.
Capital budget is an important aspect of strategic decision involving the
financial management in the purchase of the fixed asset, firms commit large
amount of capital.. The result of his capital commitment continue over a
long time with subsequent lose of flexibility in decision!making. part from
lose of flexibility in the long age to event, expansion of the fixed asset is
always related to the future sale and future sale are also forecast.
cquisition of the an asset with a five year economic live span means a
"0
forecast of sale to be made over the same period of time. Therefore, failure
to forecast accurately result in the under!investment of the fixed asset.
The outcome of the research work will be significant to the management of
the Nigerian breweries limited who is faced with capital budgeting decision
problem.
6urthermore, it will be significant to the investor who which to invest in
capital project.
6inally it will be 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.
STATEMENT OF HYPOTHESIS
Ho: that evaluation techniques used by the company management is
adequate for good decision!making
Hi: that the evaluation techniques used by the company are not adequate fir
good decision making
""
Ho: the evaluation the capital project in not important in the Nigerian
breweries
Hi: the evaluation of a capital project is not important in the Nigerian
breweries.
SCOPE OF THE STUDY
The study will examine the capital budgeting techniques of the Nigerian
breweries and will be able to established if there is any relationship between
the budgeting techniques adopted by the firm with stated in the theory
LIMITATION OF THE STUDY
8imitation abounds in this type of study. )o far the limitation encountered
are as follows
ccess to the documentsC experience has shown that apart from carrying
out academic research in firm, it is also difficult to gain access to the
document. This is because that firm has certain secrets commits to written
"(
which they will not like any other person to see. This was considered
impediment to this study
Time constraintC unlimited study on defilement areas for interest would
have been conducted throughout the world if there were enough time for
that. Time constraint was the most inhibiting factor which otherwise would
have enable and extensive pursuit of knowledge in this area of interest in
capital budgeting
Insuffii!n" info#$%"ion:
The researcher conducted interview in attempt to try to see some of the
document. 'ocument wanted were not obtained because of the interviewer
fear for letting out the companies secret. )ome oral information was
difficult to get.
DEFINITION OF TERM
C%&i"%' (u)*!"in*C This is a long!term plan made for expenditure
necessary to buy fixed asset for the production of the good and service
Fin%n!C This is the term used to donate the acquisition and expending of
fund to meet an economic unit objective
"*
C%s+ f'o,: This simply means a flow of cash into a firm such as revenue
from sale
C%&i"%' %ss!": This is asset of long!term nature used in the production of
goods
C%&i"%' #%"ionin*: This is the allocation of scarce capital resources among
competing economically desirable projects, which cannot be carried out to
capital or other constraint
R%n-in*C This is the arranging of project in the order of their viability with
reference to their evaluation result.
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