NIGERIA’S PRESENT INVESTMENT CLIMATE
A CRITICAL ANALYSIS OF THE FINANCIAL SYSTEM IN THE EVALUATION OF STOCKSW
The state of any nation’s economy characterized by the level of investments present in that country’s economy. Hence, in an economy like Nigeria, where inflation has been a very serious problem and has in the era of SAP (Structural Adjustment Programme) deregulation and regulation reached a very serious dimension in our economy. Worst still, when one is not sure of the actual rate of inflation, especially Nigerian economy, where economic policies one not stable. Thus, this gives a concern for the study of Nigeria’s present investment climate. A critical analysis of the financial system in the evaluation of stock.
So many questions had been raised about the viability of Nigerian economy with respect to its present investment climate, as a result in the course of this study, hypothesis was formulated and analyzed based on economic variables in order to accomplish the objectives of this work, which is to analysis the prospect in Nigerian investment and climate and how it has been hampered by the presence of inflation and other economic variable factors.
The methodology adopted in the course of this study was based on insolvent, a secondary data. The data was assembled in a way that they become relevant and construction for effective generalization. As a result, a test of hypothesis was based on correlation analysis and t-test which is considered as a statistical measure and a decision rate was applied.
In the course of this study also some major findings was noted relevant to our nigerian present investment climate. Such findings are: the presence of inflation which led to lower rate of return on investment and lesser incentives for an average investor in the economy to undertake capital investment.
Another finding was on the inversely relationship between investment and other economic variables.
As a result of this study, a recommendation was made for the government budget to show affinity to economic philosophy and a level of consistency in its economic activities and plans etc.
TABLE OF CONTENTS
1.2 Problem of the study
1.3 Objectives of the study
1.4 Statement of hypothesis
1.5 Significance of the study
1.6 Scope and limitations
1.7 Definitions of terms
2.0 Literature Review
2.1 Definition of investment
2.2 Classification of investment
2.3 General concept of stock investment
2.4 The finlationary rate in the Nigerian economy
2.5 Capital budgeting
2.6 Capital budgeting and security valuation process
2.7 Classification of capital project
2.8 The use of cash-flows in investment appraisal
2.9 The formation of long term goals
2.10 Non-discounting methods of ranking
2.11 Discounting cash-flow methods( DCF)
2.12 Time value of money
2.13 The minimum acceptable rate of return
2.14 Risk approach to analysis investment in Nigeria
2.15 The prospects of investment in Nigeria
2.16 Conclusion remarks
3.0. Research design and methodology
3.1 Research Design
3.2 Data collection techniques
3.3 Data analysis techniques
3.4 Design rule
4.0. Presentation and analysis of data
4.1 Preliminary inferences
4.2 Statistical analysis
4.3 Decision rule
Recommendation and conclusion
Summary of findings
The state of any nation’s economy is largely dependent on the level of the social, political, business and economic activities carried on in such a nation. Thus, the financial systems activities by extension have a reacting implications on the general state of any nation’s economy. It is an realisation of this fact that the importance of this study will be better appreciated.
Investment is commitment of resources made in the hope of realizing benefits that are expected to occur over a reasonably long time period in the future. Hence, investment appraisal or evaluation is concerned with the managers decisions about what, when and how to spend money on firms project. In other words, investment evaluation is a partial equilibrium technique for estimating the net contribution of a project or investment plan to set of objectives.
For purpose of evaluation, the distinction to emphasis is that between real and financial asset investment. Investment in real assets confers a night of ownership and or control over productive tangible assets. This features of real asset investment applies whether one invests in a single real asset or in a project (A project is an investment in a set of assets which are interrelated in use and could as asset complete a production or service cycle) Pecok (1989).
To invest in a financial asset on the other hand is to acquire ownership of income generating securities issued by others. This study is concerned with an examination of real assets and financial assets evaluation in an inflationary environment with over a fairly long period of time.
We may distinguish the following three aspects of project appraisal or evaluation:
a) Consideration of alternatives: This is the simple most important features since we should never incur a capital expenditure for a specific project before making certain that there is no better way to achieve the same objectives.
b) Examination of whether a proposed, independent project should be accepted.
c) Selection of a project from a set of actually exclusive project. Each call for an estimation of costs and benefits.
d) According to Francis (1988), People who have money illusion mistakenly believe that if they simply have money they must become richer. This believes ignores the fact that money can loose its purchasing power because of inflation. For instance, if the amount of wealth one has doubles during a period of time when the general price level quadruples, one is poorer even though one has more money to spend.
In the evaluation of stocks in the financial system, therefore, costs benefit analysis is better than current prices. Current prices are prices prevailing in successive periods. They are adjusted prices which reflect any inflation or deflation occurring over time.
Constant prices relate the value of goods or services to the other goods in terms of a constant unit of measurement. Constants prices may be obtained by demonstrating all prices in terms of common values, such as unit of either domestic or foreign currency at a certain date. Henson (1988).
Indeed, further adjustment of constant prices is not necessary, if we are faced only with general inflation, with changes in the general price level resulting from inflation or with price change that do not affect the value of one type of goods or services in relation to other. This is so, since the constant price would remain the same even if one could make an adjustment for the general increase in current prices by converting the later into constant prices.
Constant prices are constant for a given interval of time. Further adjustments of constant prices is necessary, if they change during subsequent time intervals, as is usually the case, since investments are long term in nature. This situation arises when inflation or price changes during subsequent time intervals affect the value of one set of goods or services in relation to the other.
1.1 PROBLEMS OF THE STUDY:
Inflation has been a very serious problem and has in the era of SAP (deregulation and regulation) reached a very serious dimension in Nigerian economy. Worst still, when one is not sure of the actual rate of inflation, especially in our Nigerian economy, where economic policies are not stable.
In principles prices changes resulting from shifts in supply or demand function for particular goods and services should not imply any change in the general price level.
Therefore, the major problems that confront the researcher includes:
1. The analysis of effect of inflation in corporate capital investment decisions.
2. The evaluation and comparison of the ways in which inflation considerations are incorporated in the evaluation of capital investment proposals.
3. The analysis of the contribution of inflation to the overall risk of an investment.
The researcher will adopt the cash flow method and to tackle and examine the problem of:
a. Determining the circumstances under which methods yields the same result.
b. Determining the conditions that may lead the result to diverge
c. Implementing the methods.
1.2 OBJECTIVES OF THE STUDY
The objective study as follows:
1. To discuss some of the implication of changes in the rate of inflation on the return and profitability of capital investment in an inflationary financial system (economy).
2. To analyze and compare approaches to incorporating inflation considerations in the evaluation of capital investment (stock) proposals.
3. To evaluates the impacts of inflation on the behavior of Nigerian financial system (Investors).
1.3. STATEMENT OF HYPOTHESIS:
For the purpose of this study, the following hypothesis have to be used to analyze the qualitative date to be generated.
This hypothesis tends to give a tentative answer to the issues that needs to be addressed the following below are the hypothesis:
1. An increase in the inflationary rate does not reduce the purchasing power of disposable income and investment.
2. An increase in the rates of taxes does not lead to decrease in investment and investors choice of stocks.
3. An increase in the rates of taxes does not lead to decrease in investment and investors choice of stocks.
1.3 SIGNIFICANCE OF THE STUDY
This study is valuable to many groups, the critical examination demonstrated here can provide a tool for estimating the future profitability of individual business under inflationary conditions. Financial managers may also funds it useful in adopting company policies to the changes economic environment. Likewise, the governmental agencies involved in economic planning will find it useful as they evaluate policies, about local and international investments, even though the study is centered in private sector investment. To financial managers, it will also recommend to them the most suitable approach to incorporating inflation consideration in project evaluation.
The limitations of unadjusted profitability of investment projects are also highlighted and this will prove valuable to shareholders and general public in determining the extent to which they can place reliance on such date.
It is also the researchers belief that the policy recommendations made would contributed to the maintenance of the suitability and efficiency in the national economy.
This study also designed as a study material for undergraduate and basic post graduate investment courses – students of finance, accountancy, business management, economics and allied subject. The researcher has tried to make the discussion intelligible to all various classes though is sometimes difficult to do this without entering into explanation that may seen futile and unnecessary to those familiar with particular fields.
1.6. DEFINITIONS OF TERMS:
1. AGGREGATE INDEX:
This is the present value (PV) of cash flows over the present value of outflows.
A stream of cash inflow that are equal in each year often referred to as an equal annual pattern of cash flows.
3. CAPITAL RATIONING:
It is the term used to describe the situation in which finance available for new investment to can amount that presents the acceptance of all projects with positive present values (when the shareholders marginal rate of time preference is used as discount rate).
4. CASH FLOWS:
A term describing both cash receipts (inflows) and cash payment (outflows).
A project can be defined as a discrete package of investments, policies and institutional and other actions designed to achieve a specific development object of set objects within a predetermined period.
The project might comprise any or a combination of the following:
- Capital investment
- Provision of services
- Institution strength for implementation and others.
Means “uncertainty of the future”.
7. A RISK INVESTMENT:
A risky investment is defined as an option whose monetary returns is not known in project certainty but for which earn arrary of alternative returns and their objective or subjective) probabilities are known.
Is the theoretical rate of change of option price with respect to stock price.
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