AN ASSESSMENT OF CAPITAL BUDGETING IN THE PRIVATE SECTOR
ABSTRACT
Capital budgeting involve basically the estimation of the cash flow, estimation of the expected cash return and application of evaluation techniques in making investment decision. This study looked into the extent to which the Nigerian breweries do carry out proper evaluation of capital project before making their investment decision as well as the extent in which other factors are consider in the decision process. The study wills assertion the extent to which capital budgeting evaluation techniques are used by the Nigerian breweries in evaluation the capital budgeted projects. And consider whether well-evaluated project will yield adequate return for investors as well as the other factor, which influence the selection of the project to be invested in.
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.
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.
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.
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.
