Investment Appraisal A Guide To Effective Managerial Decision
Project and Seminar Material for Business Administration and Management BAM
Abstract
This project work is based on “investment appraisal a guide to effective managerial decision” A case study of selected manufacturing companies in Nnewi Anambra state. These companies are Chikason group, Ebeto group and luis carter industries. Inited. This research work of investment appraisal is to help investigate the problems in selecting improper investment, and to know if investment appraisal is needed and to know the impact of investment appraisal towards managerial decision. Five research questions and four hypothesis were employed. The statistical tools used to analyze the data convent analysis. Tradition a non discounting techniques and ,discounted cashflows techniques. Chi –square techniques was adopted to measure the difference between a swt of observed frequencies and histogram was used to show the results. It was found that investment appraisal in organization encourage workers to a greater extent. Investment appraisal helps organization in analyzing it’s financial position. Other finding include the fact that investment appraisal are responsible for the promotion recognition and maintenance of organizations. The implication of this findings is that without investment appraisal many organization cannot meet the demands of the populace. It was recommend that the managers of every organization should adopt proper investment appraisal programme to enable them get the best out of their employees and that government should adopt some incentives measures reduce the cost of capital and encourage the young investor to invest wisely.
Chapter One
Introduction
1.1 Background of the Study
As business in this modern generation are growing rapidly and becoming more competitive among other investment (long run investment). Decision involves the acquisition of machinery, vehicles, buildings, patent right, new product line, copy right research and development and so on are critical decision facing managers of today’s business. however, these exists a greater task to the management when it comes to conflicting decision as regards to the selection of projects to embark on.
Under these circumstance, the management is left with series of potential projects with pregnant risk and returns. Given that the resources are limited in supply, the investor are bound to consider many factors before selecting a particular investment.
Investment is the key word to every established firm, organization both private and public make decision on projector investment at hand overtime, as managers that make decisions about a variety of specific investment, one could say that the organizations performance in any particularly year is the combined result of all the investment under way during the year.
Therefore, investment is any scheme of investing resources, which can reasonably be analyzed and appraised as an independent unit. This in-depth analysis and combination between the movements of cash outflow and cash inflow decision is known as investment appraisal.
The aspect of investment that leads to capital expenditure decision should be evaluated or appraised properly. Therefore, this research is prepared to study the investment appraisal as a guide effective managerial decisions. Appraisal of investment is one of the key drives of business financial system. Sound investment that implemented well founded strategies are essential to creating shareholders wealth and must appraised both in a proper content and with sound appraisal techniques. Under this aspect, an economic trade-off must be made between the resources of cash benefits to be obtained. Analyzing this trade is essentially an appraisal process that makes an economic assessment of combination of positive and negative cash pattern. This task is difficult because it deals with future conditions subject to uncertainties and risks.
Nevertheless, investment appraisal is of paramount importance of all investment both large and small some investments are beneficial during their early stage with high returns, however these cash inflow are not adequately maintained from such project or investment during the maturity periods. With these developments, the investors, workers, and management are not motivated with such result.
Therefore, without a planned scrutiny of the investment, management decision will be jeopardize and management standard and policy will be instable.
Having established these facts, far an effective investment appraisal the following factors and steps must be religiously considered.
- Project identification
- Project evaluation
- Project selection
The selection of an alternative should be determined by the use of these appraisal techniques
A. Non Discounting Cash Flow Techniques
- Payback period
- Accounting rate of return.
B. Discounting Cash Flow Techniques
- Net present valve (NPV)
- Internal rate of return (IRR)
- Profitability index (PI)
The application of cost analysis should be employed to determine the cost of capital and hurdle rate where discounting approach is the organization policy. The expected coupled with the uncertainties or riskness associated with the investment for an in-depth comparative analysis, with the investment for an in-depth comparative analysis with these rules and principles, managerial decision stand at the best alternative to maximize the organizational profit.
1.2 Statement of Problem
One of the things that help an organization or a firm to grow rapidly, the ability to make right decision as regards to investment. This work will help the researcher to find the possible solution to some problems that is facing management in terms of decision making in regards to investment.
- Does investment appraisal lead management to invest on the appropriate project?
- Does investment appraisal help management to invest on viable projects?
- Does correct investment decision improve productively?
1.3 Purpose / Objective of the Study
Objective of the study is to:
- Study the needs of investment appraisal to organization
- Study the impact of investment appraisal towards managerial decision.
- Investigate the problems on centered in the use of discounting and discounting appraisal techniques in selecting some conflicting investment.
1.4 Purpose / Objective of the Study
The main objective of this research work is to identity and examine investment appraisal in managerial decision making. Having said this, the purpose / objectives of this study includes:
- To investigate the problems on centered in the use of discounting and appraisal techniques in selecting some conflicting investment.
- Study the impact of investment appraisal towards managerial decision.
- To study the needs of investment appraisal to organizations
1.5 Significant of the Study
This research work of investment appraisal is very important the solution and the recommendation that emanate form this study will assist the financial analyst and the managers in their decision making towards capital investment.
It help and expose managers to understand the need to appraisal and any given investment to know its viability.
It also aids the managers in knowing the factors and appraisal techniques to consider during mutually independent or conflicting investment.
1.6 Research Questions
- Does investment appraisal play an important role in manufacturing firms?
- Does management makes right decision towards investment?
- Does investment trades on the right projects?
- Does the appraisal techniques use in evaluating investment appraisal adequate?
- Does investing on the right project improve the firm\s profitability of investment opportunity?
1.7 Research Hypothesis
Tests are to be concluded to ascertain the result of the following hypothesis.
- Ho: Investment appraisal does not aid effective managerial decision making.
Hi: Investment appraisal aid effective managerial decision making. - Ho: There is no significant relationship between investments appraisal and the firm’s productivity
Hi: There is significant relationship between investments appraisal and the firms productivity
1.8 Scope of the Study
This research work was conducted with selected industries in Nnewi such as Chikason Group, Luis Carter Indusries Nnewi. Being that these companies represent other manufacturing industrie. Although the researcher would have like ot carry out moer esearch on their companies in Nnewi. But due to shortage of time and other constraint, the above companies where the one which this research has been conduct in place of others.
1.9 Definition of Terms
Accounting Rate of Return (ARR)
It is non-discount cash flow capital budgeting technique expressed as the expected average annual operating income divided by the initial investment.
Balanced Score Card:
It is a performance measure system that strikes a balance between financial and ooperating measures link performance to rewards, and gives explicit recognition to the diversify of stake holder interest.
Accounting System
It is a formal mechanism for gathering, organizing and communicating information about an organizations activities.
Payback Period
This is a technique measures projects on the basic of the period over which the investment pays back itself or he period of recovery of the initial investment or it is defined as the period usually expressed in years, in which the cash outflows will equate the cash inflow form a project (CIMA)
Concept of Annuity
An annuity is a constant sum of money receivable or payable over a specific period of time.
Net Present Value (NPV)
Is a summation of all discounted cash flow (DCF) associated with a project, this is the difference between he present value of cash out lay or outflow and the positive present value of the cash inflows.
Internal Rate of Return
Is that cost of capital or return that will produce an NPV of zero if applied to a project. It is a break even point cost of capital.
Capiralt Rationing:
Is a situation in which a company does not have sufficient fund to execute worth while investment projects.
Profitability Index (PI)
It is the contribution per limiting factor approach that is, it is actually a benefit / cost analysis of projects.
Inflation
Refers to increase in estimates as a result of changes in price levels.
Risk
Is a situation in which the occurrence of future uncertain events is known but the possibilities of such future events can quantified.
Uncertainty
Is a situation in which the probability or possibility of occurrence of such future event can not be quantified.
Decision Making
Is the purposeful choice from among a set of alternative courses of action designed to achieve some objective.
Investment Center
Is a responsibility center where success is measured not only by its income but also by relating that income to its invested capital as in ration of income to the value of the capital employed.
Chapter Five
Summary, Conclusion and Recommendation
5.1 Summary of Findings
The major findings of the study are as follows:
- Investment appraisal in an organization encourage workers to a greater extent.
- Investment appraisal also increase workers performance and their moral towards achieving organization goals.
- It enhances the overall productivity of the organization.
- There are many factors that are responsible for the promotion, recognition and maintenance etc.
- Investment appraisal make management to make the right decision and give them sense of belonness and also makes them to be more committed and deveoted to their worker.
- Investment appraisal will enable employees to work more effectively towards the achievement of the organization goals. when there is a better working environment that is all conducive for the workers.
- Investment appraisal helps organizations in analyzing its financial position.
- Investment appraisal will enable employees to specialized on a particular job and compensated for a work well done.
5.2 Conclusion
Based on the findings, of the study, the following conclusion were made.
- Since investment appraisal is highly needed in organization, it implied that an organization without proper investment is back to have low performance of workers and well as well have low over all productivity.
- Investment therefore, helps to make workers feel happy about their jobs and generally increase heir moral.
- It will make workers to use their potentials effectively and efficiently in the area they specialized most in a organization.
- It null enable management to make conscious effort to increase the awareness of the need of their subordinates and the kind of motivation they require.
- This study covered the effect of investment appraisal in organization which focuses on the productivity of workers in an organization, specifically on a selected manufacturing companies in Nnewi.
5.3 Recommendation
- The manager of every organization should adopt proper investment appraisal progamme to enable him get the best out of her employers.
- Managers should make their employees to have a sense of belong ness and make the organization goals balance with the individual goals (integration) this indirectly motivate workers and make them have personal satisfaction with their job.
- Managers / investors should adopt the discounting Investment appraisal techniques for effective decision making.
- Government and general public should be stable in their policy formulation to enable the manager, and financial analyst to have solid base in investment projections.
- Proper records should be maintained on old existing assets (machinery) as this would help to determine the viability of new machines during decision making.
- Finally, government should adopt some incentives measures, reduce the cost of capital and encourage he young investors to invest wisely.
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