INVESTMENT APPRAISAL TECHNIQUES AND THEIR APPLICATIONS BY FINANCE/ INVESTMENT HOUSES
(A CASE OF UNION BANK PLC ENUGU URBAN)
Events over the years have shown that investors present and potential wants to invest their funds in anticipation of good future returns INVESTMENT APPRAISAL TECHNIQUES and its resultant making of decision is critical to all investors (both institutional and individual investors) aspiring to expand their investment income.
The purpose of this write up arose from the need to determine whether:
- The theoretical investment evaluation techniques are being adopted by investment analysis in the appraisal of real life capital project
- The net present value (NPV) criterion is widely accepted at the most reliable evaluation technique by investment analysts.
- Investment decision advice seekers are to further bring to light the theory and practice of decision-making criteria to the knowledge of students investors (present and potential) analyst.
On the basis of the foregoing this research work was centered on investment/ finance house, which is a sub-sector of the finance. And most of research works were carried out in the case study of Union Bank PLC Enugu Urban.
TABLE OF CONTENT
1.0 Introduction/ background of study
1.1 The investment finance house (company)
1.2 Purpose of study
1.3 Research questions
1.4 Statement of hypothesis
1.5 Scope and limitation of study
1.6 Concise history of G.I.W.A
1.7 Definition of term.
2.0 Review of related literature
2.1 Definition nature and concept of investment decision
2.2 Importance and type of investment decision
2.3 The concept of investment appraisal
2.4 Investment appraisal techniques
2.5 Evaluation of the N.P.V method.
3.0 Research method and design
3.1 Method and sources of data
3.2 Research population
3.3 Sampling methods used
4.0 Data presentation analysis and interpretations
4.1 Presentation and analysis of data from questionnaire
4.2 Test of hypothesis
4.3 Interpretation of data
1.0 INTRODUCTION BACKGROUND OF STUDY
The efficient allocation of capital is the most important finance function in modern time. It involves decision to commit a firm’s fund to the long-term assets. Such decision are of considerable importance to a firm or business organization since they tend to determine value and size by influencing its growth profitability and risk.
Investment appraisal as it is sometimes called is a means of assessing whether capital expended on (or allocated to) a project would show a satisfactory rate of return to an undertaking either absolutely or when compared with expenditure on alternative project and of indicating the optimum time to invest. To be above to give an efficient decision on investment profitability the analysts would require stick come in the evaluation process.
All possible system of achieving this need are to be brought into consideration and bearing in mind attendant merits and demerits of each system or techniques relating some to the circumstance of individual project. He analyst should also be well equipped as to giving a reliable appraisal of such investment proposals.
The implication therefore is the investment appraisal or evaluation can be carried out by more than one system or technique each possessing a particular merits and demerits which result in their respective feature and conditions for evaluation. The cause of these individual feature merits demerits etc is the peculiar method (strategy) adopted by a particular system technique. This in the evaluation process the analyst would need to consider the nature and condition of my given project (investment) so as to know which of the techniques will appropriately be in match and after all be used in the appraisal process since it will give the most reliable appraisal criterion or basis.
1.1 THE INVESTMENT/FINANCIAL HOUSES (COMPANIES)
Investment is the ploughing one’s finance or funds into projects or assets (be it tangible or financial assets) with a view to increasing one’s wealth. In the same vein investment houses can be described as a financial institution or intermediaries whose chief function is or relates with the financing of project of capital nature and providing financial advisory service. It’s a sub-sector of the finance industry and shares business terrain with other fiancé house mortgage institutions banking (merchants commercial and others specialized banks) discount houses and insurance companies etc.
OTHER FUNCTION OF THE INVESTMENT HOUSES OR COMPANIES ARE
- Fund management
- Importance finance and advisory services
- Hire purchase services
- Housing business etc.
The advisory services been rendered by the investment houses are usually and most often concerned with the discussion on the profitability and viability of investment (capital expenditure). These investment houses are investment bureau and from the foregoing its then reasonable enough to think and regard investment houses as an example of companies in which mainly professional on the implication incomes the capital investment analysts which is carried out by non-no voice to the field having or possessing evaluation technique as a result reliability of out come is the watch word.
Therefore a choice of use of a particular investment appraisal criteria by these groups of personnel will connect high rating for the particular method or technique adopted in terms of reliability suitability etc.
1.2 PURPOSE OF STUDY
This work up is prompted by the need to know whether the supposed theoretical upliftment of the net present value technique of appraising capital project is in same manager highly recognized accepted and relied upon on practice by investment analysts.
Other information the writer wish to deduce from this research work are as follows:
- Is there a deviation in practice and reality of the use of investment appraisal technique or criteria form theory.
- The effect (extent of) investment criteria technique on real life investment and capital expenditure in terms of profitability viability and its ability to increase the wealth of the firm
1.3 RESEARCH QUESTIONS
This project work seeks to discover whether there exist stick adherence to the principles underlying the theoretical investment appraisal techniques in evaluating profitability and reliability of a capital expenditure by investment and finance house specifically the work study and to answer the following questions.
- Is the Net present value methods of evaluating project reliable and acceptable in practiced.
- Do intending investor really seek for investment advice from investment house?
- Is there a deviation in practice from theory of the techniques
1.4 STATEMENT OF HYPOTHESIS
For the purpose of project and its research questions the following research hypothesis were formed and tested.
H1: The net present value (NPV) method is the most reliable and acceptable
investment evaluation technique
appraisal techniques by investment analysts in the evaluation of projects.
1.5 SCOPE OF STUDY
The write up intended to cover all are relating to apprising investment on fixed assets by companies. There by highlighting the various types of criteria on financial matters concerning funds procurement which may not be included in this study.
In deriving information for this project area of study have been confirmed to Enugu metropolis. Here mostly investment house have been the competes from which information and suggestions have been sought. Although the researcher tried to extend this sample companies to include banks especially merchant and mortgage bank. The essence being to seek for possible variations in opinion by accountants and financial managers there in
1.6 CONCISE HISTORY G.I.WA
The golden investment (W.A) limited was incorporated as a private limited liability company in accordance with the Nigeria law. Of financial appraisal of their companies capital restructuring and advisory on sources of funding for efficient financial structure.
The company GIWAL is strategically intact it occupies the ground top floors of an ultra modern building located at No 117 Agbani road by Nise bus stop junction Enugu, Enugu state.
Conventional investment are those investments with one or more period of out flow followed by cash proceed. It can also be described as the type of investment with one or more periods of inflows followed by the cash outlays as in obtaining loans.
The important fact here is that the cash outlaws will start and end before the inflows or that the inflows will start and end before the outflows.
Now- conventional investment exhibits no definite pattern of cash flows can be interrupted by a period of cash flows and vice versa. The conventional investment carry a single rate of return while non- conventional can have multiple rates of return which I usually a problem associated with its determination.
Investment project are said to be mutually exclusive when acceptance of one investment completely excludes or eliminates the expected cash flows of the other investment. For example in order to distribute its product a company may decide either to establish its own sales organization or engage outside distributor.
The more profitable out of the two alternative shall be selected. This type of exclusiveness may be referred to as technical exclusive. One the other hand two independent project may also be mutually exclusive it a financial constraint is imposed. If limited fund are available to accept either project ‘A’ or project ‘B’ this would be an example of financial exclusiveness or capital rationing.
1.7 DEFINITION OF TERMS
The following terms have been used in the can text of this project will the meaning specified strictly and according to particular context of the writing
INVESTMENT: Strictly defined investment is the ploughing of one’s finance or funds into projects assets (be it tangible or financial assets) with a view of increasing one’s wealth. It can also be defined as expenditure on real capital goods although in every day language it’s also taken to mean purchase of any assets or indeed the undertaking of any commitment which involves an initial sacrifice (outflows) followed by sub-sequent benefits (inflows)
FINANCE: The provision of money when and where required simply put. However in stick terms finance can be defined as the total activities involved in the process of acquiring or procuring of funds and its use there off in the attainment of the objective of an organization including the dividend policy.
FINANCE HOUSE/COMPANIES: For the purpose of this project a finance house is one licensed by the CBN as a finance company to provide specified service. It is also a sub-sector of the finance industry.
CASH FLOW: Cash flow is simply the difference between naira’s received and naira’s paid out by a firm. It can also said to be the movement of money into and out of a firm. This should not be confused with profit changes profit do no necessarily mean changes in cash flow.
PROFIT: The excess of income over revenue expenditure. This is not the something as cash at least for two reasons namely.
- Profit (accountants) is based on the accrnal concept; sales is recognized when its earned rather then when cash is received and expenses is recognized when its incurred rather than when cash is paid. This is not so with cash flow.
- Capital expenditure is not charged in the profit and loss account when calculating profit while for cash flow all capital expenditures are also included.
COST OF CAPITAL: The cost of capital can be regarded as that amount of earning which must be sustained in order to ensure that the market value of equity stock of a company does not drop. It can also be referred to as the minimum rate of return which will maintain the market value per share of its current level.
However for the purpose of this write-up the cost of capital is defined as the cash flow foregone from not accepting a competing opportunity to invest at similar risk.
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