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Capital Budgeting Decision In Manufacturing Company
[A CASE STUDY OF VITAL FOAM NIGERIA PLC LAGOS]
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1.4 RESEARCH QUESTION
In the course of this research study the respondents will be able to answer to these questions.
1. What are capital budgeting decision?
2. Why and how does manufacturing company get involved in capital budgeting decision?
3. Is there a consensus in the choice of capital budgeting evaluation or appraisal techniques in manufacturing company?
4. how do the manufacturing concerns acquire data relevant for capital budgeting decision making?
5. What role does uncertainty play in investment decision?
1.5 RESEARCH HYPOTHESIS
In order to arrive at logical conclusion on this research study the following hypotheses will be considered.
1. Hi: Capital budgeting decision has no significant influence on the success of an investment outlay.
Ho: Capital budgeting decision has significant influence on the success of an investment outlay
2. Ho: Capital budgeting decision is not indepednet on the relevant data acquired
Hi: Capital budgeting decision is independent on the relevant data acquired
1.6 SIGNIFICANT OF THE STUDY
It has been established that capital budgeting decision are inevitable due to their effect on effectiveness and efficiency in manufacturing company in Nigeria business. This study is attempt towards achieving its aims stakeholders will then be at an advantage to make reasonable and rational decision based on the finding conclusion and recommendations of the study.
1.7 SCOPE AND LIMITATION OF THE STUDY
This work focuses on medium long term investment. It is in this regard phrase “capital budgeting decision we carefully chosen. Again, consideration will be limited to only select manufacturing company. It will however cover firm directly engaged in converting raw materials of any form to usuable forms.
Sample company shall be drawn from manufacturing concerns in Lagos state.
Capital budgeting decision is a top management function officers at this level may be very busy and unwilling to satisfactory complete and return the questionnaires. Other problems that would likely face during the course of this study area in the area of time. Funds and geographical distance in collecting data and information from sample and chosen manufacturing concern location.
1.8 DEFINITION OF THE TERMS
1. Capital budgeting: Is the process of planning evaluating proposals for investment in plant assets.
2. Discount rate: is the required rate of return used by an investors to discount future cash flows to their present value.
3. Present value: Is the excess of the present value of there net cash flows expected from an investment over the amount to be invested. NPV is one method of rangking alternative investment opportunities.
4. Payback period: is the length of time necessary to recover the cost of an investment through the cash flows generated by that investment. PSP is one criterion used in making capital budgeting decisions.
5. Present value: Is the amount of money today which is consider equivalent to cash in flow or out flow expected to take place in the future. The present value of money is always less then the future amount since money on hand today can be invested to become the equivalent of a larger amount in the future.
6. Relevant cost: is a cost which should be given consideration in making a specific decision.
7. Uncertainty: This is situation in which an event or activity is not likely to happen or occur. This is very vital element in capital investment decision.
8. Long term assets: These are the assets which affects the firm’s operation beyond the one year period.
9. profitability index: The profitability index or benefit/ cost ratio of a project is the present value of future net cash flows over the initial cash outlay. Simply put present value of inflows over the present value of outflows.
10. Discounted payback period: The principles and decision rules are the same as in the normal pay back period method, the only difference, is that the cash flows to be used are discounted at the given or appropriate cost of capital.
11. Mutually exclusive project: these are project that are to be appraisal for acceptance/ rejection solely on each project’s individual merit.
12. Internal rate of return: The internal rate return or yield for investment is the discount rate equates the present value of the expected cash outflows with the present of the expected inflows.
13. Sunk cost: that is historical cost, it represents a amount that has already been incurred prior. To the investment under consideration e.g. research and development (where already incurred), preliminary expenses etc. it should be considered irrelevant
14. Depreciation: This is an accounting derivation and does not involve the physical movement of cash as such should be disregarded.
15. investment decision: This involves the identification of viable projects i.e. it deals with appraisal of projects using various techniques to determine those that are viable.
16. Opportunity: This is defined as the maximum contribution that is forgone but using limited resources for a particular purpose. An alternative way of describing opportunity cost is as the value of a benefit sacrificed in favour of an alternative course of action.
17. Risk: is a situation in which we do not know exactly the performance of the future uncertain events but we can qualify the possibilities of such future event.
18. Financial decision: this involves the identification of the appropriate sources of finance that would be used to finance projects.
19. Divided decision: Here attention is focused on the compensation required by the providers of funds i.e. this is the determination required of the appropriate amount to be paid as dividend and the profit that would be ploughed back to finance expansion in the company.
20. History of vitafoam Nigeria Plc.
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