An Evaluation Of The Impact Of Capital Budgeting On Organisational Performance (A Case Study Of Ondo State Ministry Of Works)

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An Evaluation Of The Impact Of Capital Budgeting On Organisational Performance (A Case Study Of Ondo State Ministry Of Works)


Abstract


This study was intended to evaluate the impact of capital budgeting on organizational performance. This study was guided by the following objectives; To determine the nature of capital budgeting; to determine the nature of organizational performance; to determine the impact of capital budgeting on organizational performance; to determine the impact of capital budgeting on the performance of ondo state ministry of works. The study employed the descriptive and explanatory design; questionnaires in addition to library research were applied in order to collect data. Primary and secondary data sources were used and data was analyzed using the chi square statistical tool at 5% level of significance which was presented in frequency tables and percentage. The respondents under the study were 50 employees of the Ondo state ministry of works. The study findings revealed that capital budgeting significantly impacts on organizational performance; based on the findings from the study, efforts should be made by the Nigerian government and stakeholders in promoting and ensuring capital budgeting and implementation.


Chapter One


Introduction

1.1 Background of the Study

An efficient economic system calls for a dependable mechanism to allocate its resources. Christy (1966) describesthat land, labour and capital are to be directed to their best uses, and should hence be placed in the hands of those who can use them most capably. In a market economy, this allocation process consists largely of a set of private decisions, which are directed by a network of free markets and flexible prices . Important among these decisions are capital investments decisions that according to Northcott (1995) are vital at two levels: for the futureoperability of the individual firm making the investment, and for the economy of the nation as a whole. At the firm level, capital investment decisions have implications for many aspects of operations, and often exert a crucial impact on survival,profitability and growth. At the national level, the proper planning and allocation of capital investment are essential to an efficient utilisation of other resources,poorly placed investment reduces the productivity of labour and materials and sets a lower ceiling on the economy’s potential output. With this in mind it is no wonder that capital investment or capital budgeting is a central application of financial theory .the advantages and applications of sophisticated capital budgeting procedures based on cash flows, risk and the time value of money are seen as tools for maximising shareholders’ wealth, which is the same as maximising the value of the firm (Copeland & Weston, 1992). This fact is often approximated to the relationship that firms using more sophisticated capital budgeting procedures should be able to perform better over time (Christy, 1966; Klammer, 1973). Empirical studies concerning the adoption of sophisticated capital budgeting procedures have shown that even though the degree of adoption has increased over time, there is an obvious “theory-practice gap” (Klammer, 1972; Schall, Sundem & Geijsbeek, 1978; and Graham & Harvey, 2001).

The research therefore seek to evaluate the impact of capital budgeting on organizational performance


1.2 Statement of the Problem

Investment on capital project constitute a major financial budget of a firm.

Therefore it is pivotal that it impacts positively on the firms performance in terms of profitability, market share, growth and shareholders value.

However many organization make huge capital investment without exacting Positive result on the firmsoperations.This is as a result of lack of proper Appraisal to determine the relative worth of such investment.Capital budgeting is the process in which a business determines whether projects such asbuilding a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project’s lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target .Also known as “investment appraisal.Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.Popular methods of capital budgeting include net present value (NPV),internal rate of return (IRR),discounted cash flow (DCF) and payback period

Therefore the problem confronting the research is to determine the impact of capital budgeting on organizational performance.


1.3 Research Question

  1. What is the nature of capital budgeting
  2. What constitute the nature of organizational performance
  3. What is the impact of capital budgeting on organizational performance
  4. What is the impact of capital budgeting in ondo state ministry of works

1.4 Objective of the Research

  1. To determine the nature of capital budgeting
  2. To determine the nature of organizational performance
  3. To determine the impact of capital budgeting on organizational performance
  4. To determine the impact of capital budgeting on the performance of ondo state ministry of works

1.5 Significance of the Research

The research shall provide an analysis of capital budgeting and the techniques applicable in capital budgeting techniques.

It shall serve as a source of information to managers and other professionals.


1.6 Statement of Hypothesis

  1. Ho Capital budgeting is not significant in ondo state ministry of works
    Hi Capital budgeting is significant in ondo state ministry of works
  2. Ho organizational performance in ondo state ministry of works is low
    Hi organizational performance in ondo state ministry of works is high
  3. Ho The impact of capital budgeting on performance in ondo state ministry Of works is low
    Hi The impact of capital budgeting on performance in ondo state ministryOf works is high

1.7 Scope of the Study

The study focuses on the evaluation ofthe impact of capital budgeting on organizational performance with a case study of the ondo state ministry of works.


1.8 Definition of Terms

Capital Budgeting Defined

Capital budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project’s lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target .Also known as “investment appraisal. Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time. Popular methods of capital budgeting include net present value (NPV),internal rate of return (IRR),discounted cash flow (DCF) and payback period

Organisational Performance Defined

Organization performance relates to how successfully an organised group of people with a particular purpose perform a function. Essentially, this is what we are speaking about when we refer to organisational performance and achievement of successful outcomes. High organisational performance is when all the parts of an organisation work together to achieve great results with results being measured in terms of the value we deliver to customers.

Strategic objectives

Provide the direction in which everyone within the organisation should head. They provide focus and ensure we are all working towards the same end.

Organisational Structure

This represents the form in which the organisation will deliver its services. The structure must support the strategy just as the strategy must have regard to the structure. For instance, an on-line delivery strategy will not be successfully executed unless the organisation has on-line capabilities.

Business Performance Measures

Represent the measures by which each area of the organisation will be assessed. There is no single set of measures that may be applied across all organisations. In order to be relevant and of use to the organisation, the measures must be determined in light of the organisation’s goals and the strategies put in place to achieve those goals. It is this measurement process that will direct behaviour more than any other system that may be put in place. Further, the information must be easily obtainable – in a timely manner. This requires the management information systems to be developed to collect the right data in an efficient way.

Allocation of Resources and Processes

Relates to the decision making approach that takes place within the organisation. It is how the organisation goes about deciding where to apply its scarce resources – including money, time and effort – in order to achieve its objectives.


Chapter Five


Findings, Conclusion and Recommendation

The objectives of this study were:

  1. To determine the nature of capital budgeting
  2. To determine the nature of organizational performance
  3. To determine the impact of capital budgeting on organizational performance
  4. To determine the impact of capital budgeting on the performance of ondo state ministry of works

Findings from the study revealed the following

  1. Capital budgeting is significant in ondo state ministry of works.
  2. Organizational performance in ondo state ministry of works is high.
  3. The impact of capital budgeting budgeting on performance in ondo state is high.
  4. Budgeting adequately improves organizational performance.

Conclusion

Budgeting is one of the fundamental decision-making processes in organizations. During budget formulation, officials determine the portion of the organization’s resources that the manager of each unit will be authorized to spend… budgets often establish performance goals for the unit in terms of costs, revenues, and/or production (Little et al., 2002). Performance indicators therefore become critical while allocating the scarce resources. This is a succinct and accurate summation of the importance of the budgeting function within the majority of organizations. As demonstrated by the organization investigated, budgets are used in differing degrees and for different purposes across different industries. Some industries use budgeting as a control of expenditures, where other businesses use budget functions as a tool for planning, a means of communication, or as a goal to measure performance. The benefits of budgeting were not minimized despite the source of initial funding (i.e. public funds, taxpayer funds, shareholder investments or privately acquired monies). Although companies institute budgeting formats in different ways, all companies benefit from its use, and budgeting functions perform an important mechanism in a firm’s organizational architecture-corporate and business success depends on it. The closest study to the current one was undertaken by Kadondi (1987), focusing on capital budgeting techniques used by companies listed at the NSE. The current study is different in that while Kadondi focused on the private sector, the study focuses on the public sector, specifically the ondo state ministry of works. In addition, the current study goes further to establish the relationship between capital budgeting techniques and organizational performance.


Recommendation

The study revealed that there is a tendency among the state ministries towards the use of sophisticated capital budgeting techniques. Moreso, there was a statistical association between the capital budgeting technique used and company performance. Based on the findings, the study concludes with some recommendations. Taking into consideration the importance of capital investment decisions, it is imperative that the executives who make the decisions use the best techniques and tools available to them to ensure that they make an informed decision. It must also be borne in mind that it is not only personnel in charge of finance who should understand the investment process. All the divisions of a company provide inputs in the form of the estimates needed to evaluate projects. After all, because capital investments have a fundamental impact on the long-term strategies of the company, they do eventually affect every department within the company. It must also be said that there are many other factors that must be taken into account when evaluating a capital investment. Legal requirements, environmental laws, strategic factors and the requirement to keep up with technology must all be taken into account. In addition, investment decision is made on the basis of one single parameter. Discounted cash flow technique is not flawless and should be applied with the necessary understanding and discretion. It must be emphasized that the use of discounted cash flow tools is intended to support a more informed decision than otherwise possible.


An Evaluation Of The Impact Of Capital Budgeting On Organisational Performance (A Case Study Of Ondo State Ministry Of Works)


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