Capital Investment Appraisal: A Comparative Study Between Public And Private Companies

Project and Seminar material for Public Administration

Project and Seminar material for Public Administration


Abstract


Company budgeting involves allocation of source financial resources to long term investment. Thus, because of the involved capital there is need for adequate manager. Through the aid of theories and provided with capital budgeting techniques that aid capital budgeting appraisal. This study investigate, the subject of capital budgeting in relation to public and private companies. The companies use such a management tool companies uses in which the application of such in the private and public sector differ.

Hence the research work focuses on organization selected from the public and private sector and the selection was based on a random selection of companies that broadly represented both companies. Findings of the study revealed that capital budgeting as investment appraisal techniques was employed more by public companies. Also business and finance theories such as return, profit and loss analysis and accounting rate of return are employed in the business studied.

This work has recommended possible way” of improving capital budgeting in the private sector such as improvement and increasing in methods adopted and improvement in management approach to capital budgeting.


Chapter One


Introduction

1.1 Background Of The Study

Business is all about investment. Investment involves a decision to part with present wealth or asset with hope of increasing the value of the wealth in future. A business right then be defined as an economic activity oriented towards producing goods and services at a profit for satisfaction of mankind.

Business organization brings man, money and material together in a concerted effort to increase the value of all these resources through a form of synergism, whereby than its parts. The business organization has it profit making objectives as one of its motivating forces. A major tool used by business manager in other to achieve the organizational goal is capital investment appraisal.

The importance of capital investment appraisal cannot be over emphaized, because management of any business needs other essential to be financially successful. Among these are the following:-

  1. A product or service in demand
  2. Adequate capital
  3. Well defined objective
  4. An adequate accounting system
  5. Competent management

This research makes a critical look at the subject of capital investment appraisal, with special emphasis on capital budgeting.

Capital expenditure involves more or less a permanent commitment of large sum of money and decision concerning them significant long term effort on the economic health of any concern. This gives room for careful analysis on the part of management in decision involved foregoing present consumption in the hope of greater future consumption. In order to forgo present consumption management should be prepared to invest on capital projects, fully appraised such that it will ascertain whether it provide a return equal to or greater than required by the shareholders.

Capital budgeting involves the decision making process with respect to involvement in fixed assets qualified call. It involves measuring the net cash inflow associated with investment proposals and evacuating the attractiveness of these cash relative to the project cost.

This research will be studying capital budgeting in public companies and private companies. Public companies here would mean corporations. These are in form of business organization that exists because the law has confirmed existence on it. The country today has many of such corporation. These public companies are mostly multi – nationals whose equity holding run into millions. Let us find out if capital investment is appraisal before being venture and if they are to what extent are they appraised.

The other case in this study is the private companies. These private companies are more in number than the multi –national companies. Private companies unlike the public companies do not have legal entity and have very much smaller capital base. These private companies are however larger in number and are set up more often. They also have to make investment decision like starting a new of product, buying current automatic machinery to replace out-dated ones. Choosing between building new factory or expanding the facilities in the existing factory, since these two forms of business makes similar capital investment decisions, the question is if we the same means in subjecting capital investment alternatives to text before decision are made. The research also tried to establish if this management tool is used by any of this business organization.

If it is been to what extent is it being applied? It is also aimed at finding out if there are any disparities existing in appraisal methods and why these difference exist. This research work also tries to print out ways of employing capital investment appraisal in private companies.


1.2 Statement Of The Problem

Phinomar Nigeria Limited did not use capital budgeting as an appraisal tool because the company business operation did not encourage the use of capital budgeting is an investment appraisal instrument
Unreliable methods of keeping records were discovered as a common practice in Phinomar Nigeria Limited.
Phinomar Nig. Ltd. Management did not term it necessary to use any appraisal tool for management decision.
Phinomar accounting staff employed for the purpose of transitional accounting function was utilized for recording keeping.


1.3 Objective Of The Study

  1. To determine to what extent did Phinomar Nigeria Limited did not encourage the use of capital budgeting as an investment appraisal
  2. To find out reason. For inadequate or non – existence of the capital investment appraisal in Phinomar Nigeria Limited.
  3. To suggest solution towards a better structure and effective conduct of appraisal in Phinomar Nigeria Limited. Also suggest possible ways of encouraging the Phinomar to use and possible improve on capital investment method.
  4. To examine the methods of investment appraisal in PHINOMAR NIG – LTD
  5. To determine whether they have approved adequate or otherwise.

1.4 Research Questions

The research questions are as follows:

  1. Had PHINOMAR NIG.LTD applied these management tool for their investment appraisal instrument.
  2. To what extent is it being applied in the PHINOMAR as an instrument for the capital budgeting.
  3. Does any disparities existing in applying management tool and why these difference exist.
  4. To what extent does it help PHINOMAR approved adequate in taking decision in their business.

1.5 Scope And Limitation Of The Study

The scope of the project boarder on capital investment appraisal in Phinomar Nigeria Limited as a case study. It tries as much as possible to cover various aspect of capital budgeting which includes formation of long –term goals, searching for investment proposal estimation and forecasting of current and future cash flow economic evaluation of alternative project, the preparation of appropriation and control budget, and integration of those budgets in the firms information system review of the performance of post projects.

The study will cover selected private company (Phinomar Nigeria Limited as a case study in the project. The study will definitely be more encompanies if it covered as many institution as possible, due to limitation in time factor and money the research will only cover a selected company chosen.


1.6 Significance Of The Study

The important of the study of capital investment appraisal in Phinomar Nigeria Limited involves the decision making process with respect to investment in fixed assets specifically.

It helps the manager to determining the long term objective of the company business

The successful administration of capital investment appraisal in Phinomar Nigeria Limited involves

  1. Generation of investment proposal
  2. Selection of project budget
  3. Execution of project budget
  4. Estimation of cash flow

It help assist manager in Phinomar to improve and adopt strategies to reduce loss of capital in the business operation.

It ensure reliable methods of keeping records.


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