CAPITAL BUDGETING IN THE PRIVATE SECTOR

(Accounting)

CAPITAL BUDGETING IN THE PRIVATE SECTOR

TABLE OF CONTENT

CHAPTER ONE

1.1              Introduction

1.2              Problem statement

1.3              Objectives of the study

1.4              Hypothesis

1.5              Significance of study

1.6              Definition of terms

CHAPTER TWO

2.1              Demand for capital (Financial forecasting)

2.2              Regression method

2.3              Long term financing (Support of capital)

2.4              Common stock/equity issues

2.5              Corporate debt

2.6              Straight referred stock

2.7              Weighted cost of capital

2.8              Ranking investment proposal

CHAPTER THREE

3.1              Summary of findings

3.2              Recommendations

3.3              Conclusion

REFERENE

CHAPTER ONE

INTRODUCTION

 

            Every business firm normally will like to know hoe it performed over a period of time, thus leading to the preparation of profit and loss statement.  They also ask about their position at a particular pointing time, which leads them to prepare balance sheet.

            Finally, they will like to know where they are heading, which has led to the preparation of budgets.

            Budget is term used locally by a layman.  Layman confuse budgeting with planning.  A budget is part of a plan.  A plan can be expressed in monetary and non-monetary term.  Any plan that is qualified in monetary term is a budget.  A budget, therefore can be socially defined as a statement of intention qualified in monetary term.

            In budgeting there are types of budget prepared by firms.  Such budgets includes capital budgets, cash budget, sales budgets so on.

            The process of preparing capital budget is called capital budgeting.  Capital budgets are long term budgets made for acquisition and expansion for fixed assets.  Many firms prepare capital budgets today.  It was originated in the United States of America (USA).  In America it was applied by firms before the Second World War.  After the Second World War, may firm saw the need to plan for capital expenditure, hence it is prevalence today.

PROBLEM STATEMENT

            The main purpose of setting up a private is to achieve enough sales revenue that will cover fixed and variable costs as well as leave out enough profit to justify its existence.

            Nigeria Breweries Limited being a private enterprise involved in brewing beer has the objective of making huge profit.

            Breweries all over Nigeria witness heavy return on their investments due to export of their products to neighbouring African countries as well as the high consumption rate of beer in the country.

            In order to produce firms in the breweries industry acquire fixed assets as well as raw material.  These acquisitions are based on expected demand.  The demand for beer cannot now be fairly estimated because of the general rise in prices.  General rise in prices has made consumers of beer shift their demand to other goods of necessity thus leading to decrease in demand.

            Apart from capital budgeting problems caused by uncertainly in demand, there is also the problem caused by tariff or import restrictions on the importation of fixed assets and spare parts.  This singular problem has helped in no small measure in fueling the amber of problems encountered by these firms.  It has made firms search for alternative source of obtaining fixed assets necessary first for production operations.

            Even when these fixed assets are source, there is often an increase in the price paid for them as a result of import tariffs or restrictions.  The uncertainty surrounding this has made it a capital budgeting problem.

            Increase in price of fixed assets as a result of import restrictions and the small nature of the financial capability have made firms like Nigeria breweries limited to rank the projects they wish to embark upon.  There is always the problem of appropriate method of selection that will be peculiar to a given project.  Also encountered in the selection of project is the human problem in the organization, which is a function of the state of mind of the individual in charge of the capital, budgeting.

            Banks and other financial institution charge interest on the money they lend out.  Interests on the charges are based on negotiations or what prevails in the banking  industry as directed by the Central Bank of Nigeria.

            Interest charges fluctuate widely with the economic condition.  Due to the dynamic nature of the economy will consequent effect on interest rate; it is a problem making cost benefit analysis necessary in capital budgeting.  Even when the above problems are solved to a great extent, there remains the problems of obtaining foreign exchange necessary to remit to exporter’s exchange rate are never stable.  The uncertainly include in this makes it a problem in capital budgeting.  These problems were what gave rise to the research objectives.

OBJECTIVE OF THE STUDY

            The objectives of this study were to find out the following:

(a)        Factors responsible for the demand for beer and the effect demand has on capital budgeting, other operations of the company and its existence.

(b)        Why external sources of finance is used instead of floating stock of shares given its financial constraints and high interest rate on external financing.

(c)        Ways in which purchased capital assets are paid for example through letters of credit, documentary bills for collection, open transfers.

(d)       The effect over or under investment have on the firm.

(e)        The effects delaying arrival of ordered assets or payments for them here on the production of beer.

(f)        How they forecast sales or demand given its fluctuations as a result of general rise in prices.  In connection with the above objectives was the necessity to formulate hypothesis.

HYPOTHESIS

The following hypothesis was formulated with respect to this study.

1.         Fluctuations in demand have no effect on capital budgeting and other operations of the firm.

2.         There are no problems in the capital budgeting of firms.

3.         The company does not seek floatation of stock in the stock exchange because if does not want external in both its operations and management.

4.         There is no problem encountered so far as the method used for payment of capital assets purchased.

SIGNIFICANCE OF STUDY

A lot of factors make capital budgeting important in productive and commercial spheres of any economy.  These factors include:

Loss of flexibility “some of the information on this were taken from “essentials of management finance” by J.F. Weston and E.F. Brigham” after commitment of funds to projects, the relationship of the availability of capital assets and the quality of assets purchased, substantial expenditure which funds are not often automatically available and failure of firms as a result of too little equipment.

            Capital budgeting is an important aspect of strategic decision involving financial management.  In purchasing fixed assets firms commit large amount of capital.  The results of this capital commitment continue over a long time with subsequent loss of flexibility in decision-making.

            Apart from loss of flexibility and hostage to future events, expansions of fixed assets are always forecast.

            Over investment in fixed assets often leads to unnecessary heavy investment, which fund the firm should have employed profitability in other income yielding ventures such as securities.

            Availability of capital assets if properly phased helps the firm to buy equipment necessary to take care of intermittent spirits in demand for its production.

            This is so in that an increase in demand in excess of firm’s capacity often leads to turning away of orders.

            Capital budgeting for assets expansion is also significant in that it involves a substantial but lay of funds.  This makes it necessary for a firm to plan how to raise the needed finds as they are not always automatically available in order to be sure of funds when his expansion is embarked upon.

            Finally, most firms which failed did so not because they had too little capital equipment.  Their failure is as a result of rival companies installing automated and more efficient equipment capable of producing a higher quantity of the goods currently produced.  Also these goods are produced at relatively shorter time at reduce price.  Having stated the significance of the study of capital budgeting, the researcher found it important to define some words or terms used which she felt would make the understanding of this study easy for its readers.

DEFINITION OF TERMS

(i)         CAPIAL BUDGETING:  This is a long-term plan made for expenditures 

necessary to buy fixed assets for production of goods.

(ii)        FINANCE:  This is a term used to denote the acquisition and expanding of

funds to meet economic units objectives.

(iii)       CASH IN FLOW:  It s used to means flow of cash into a firm such as revenue from sales.

(iv)       CAPITAL ASSETS:  They are assets of long-term nature used in the production of goods.

(v)        OUTLAY OF FUNDS:  Expending of money term were defined in order to make readers understand the subject under discussion.

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