CAPITAL BUDGETING IN THE PRIVATE SECTOR.

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CAPITAL BUDGETING IN THE PRIVATE SECTOR

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Every business firm normally will like to know how it perform over a period of time thus leading to a preparation of profit and loss statement. They also ask about their position at a particular point in time, which lead then to proper balance sheet. Finally they will like to know where they are leading which led to the preparation of budget. Budgeting is a term that used by long man. Long confused budgeting with planning. a beget is part of a plan. A plan can be expressed in monetary and non-monetary terms. Any plan that is qualified in a monetary term is a budget . A budget therefore can be succinctly defined as a statement of intention qualified in monetary terms. In budgeting there are types of budget prepared by firms, such budget include capital budget, sale budget, cash budget and so on. The process of preparing capital budget is called budgeting.

Capital budget are long-term budget made for acquisition and expansion of fixed asset. Many firms prepares capital budget today. It was originated in the united state of America (U.S.A) in America it was applied by all firm before the second war. After the second war, many firm saw the need to plan for capital expenditure, hence it is prevalence today. The Nigerian brewery limited and other beverage are not left out in the train of firm of firm that prepare budget for its capital expenditure. This is however not easy as it is fought with a lot of problem.

STATEMENT OF PROBLEM

The main purpose of setting up a private firm is o archive enough sale revenue that will cover the fixed and the variable cost as well as live some profit top justify its existence. Nigerian brewery limited being a private enterprise involves a brewery beer has the objective of making big huge profit. Brewery all over Nigeria witness heavy rerun on their investment due to the expert of their product to neighboring African countries as well as the high consumption rate of beer in the country. This was before the year 1982. The introduction of many stringent economic measure after the year 1982 aim at revamping the nations live economic brought with many problem with which the brewery industries is not left out. In the order to produce, firm in the brewery industry (* including the Nigerian brewery limited) acquire fixed asset as well as raw material. This acquisition is abased on the expected demand. The demand for beer cannot now be fairly estimated because of the general rises in the price. General rise in the price of beer has made the consumers to shift their demand to other goods as necessity thud decreasing the demand for beer. The uncertainty surrounding the continuance the rate at which the demand for beer decrease has become of the problem encountered by the capital budget especially by the Nigerian breweries limited since the capacity of production is always affected by change in the demand of the product. Apart form the capital budgeting problem caused by the uncertainty in the change in the demand, there is also a problem of tariff and import restriction on the importation of fixed asset and the spar parts. The singular problem has help in no small measure in fueling the height of the problem encountered by the firm. It has also made from like the Nigerian breweries look for alternative way of obtaining fixed asset necessary for its production and operation. Even when this fixed asset are source from the , it often increased the price for them as a result of the import tariff restriction,. The uncertainty surrounding this has made a capital budget problem. Increase in price for fixed asset as a result for import restriction and the small nature of the financial capacity had made firm like the Nigerian breweries limited t rank the project hey wish to embark on. It is encountered in the selection of the project of the human problem in the organization, which is to be embark upon. There is always problem of appropriate selection that will be peculiar to a given project. As encountered in the project is the selection of human factor, which is fidelity of the state of mind of the individual in charge of the capital budgeting. Because of the small nature of the financial ability.

Nigerian brewery limited took to external source of financing in its capital project. The external source of financing include the commercial bank, trade creditors. And some financial institution. Bank and other financial institution charges interest on the money that they lend out. Interest changes fluctuated with the changes in the economic settings. Due to the dynamic nature of he economy with consequent affect on the interest rate, it is problem making cost benefit analysis necessary in the capital budgeting. Even when the able problem are solved to a great extent their remain the problem obtaining foreign exchange necessary to remit the exporters change rate. The rate is never stable. The uncertainty included in this makes a problem for capital budgeting.

PURPOSE OF THE STUDY

The purpose of the study were to find out the following

1. Ascertain the extent to which capital evaluation techniques are used by the Nigerian breweries management in evaluating their projects

2. Ascertain whether well evaluated project will yield the adequate return for the investor

3. Determine the other factor, which influence the selecting of project to be invested in.

4. The capacity of the budgeting process in the Nigerian brewery limited

SIGNIFICANCE OF THE STUDY

A lot of factor makes capital budgeting very important in the productive and the commercial fair of any economy. This factor include lose of flexibility. Some of the information on this were taken form essential of management finance by J.C Wilson and E.A Brighton. After the commitment of fund to project, the relationship between asset expansion and sale proper phasing the availability for the capital asset and the quality of the asset purchased, satanically expenditure on which fund are not automatically available and the failure of a firm as a result of too little equipment. Capital budget is an important aspect of strategic decision involving the financial management in the purchase of the fixed asset, firms commit large amount of capital.

The result of his capital commitment continue over a long time with subsequent lose of flexibility in decision-making. Apart from lose of flexibility in the long age to event, expansion of the fixed asset is always related to the future sale and future sale are also forecast. Acquisition of the an asset with a five year economic live span means a forecast of sale to be made over the same period of time. Therefore, failure to forecast accurately result in the under-investment of the fixed asset. The outcome of the research work will be significant to the management of the Nigerian breweries limited who is faced with capital budgeting decision problem. Furthermore, it will be significant to the investor who which to invest in capital project. Finally it will be equally be important to other researchers and scholars who may wish to carry out further research on the subject matter or on the related topic.

STATEMENT OF HYPOTHESIS

1. Ho: that evaluation techniques used by the company management is adequate for good decision-making

Hi: that the evaluation techniques used by the company are not adequate fir good decision making

2. Ho: the evaluation the capital project in not important in the Nigerian breweries

Hi: the evaluation of a capital project is not important in the Nigerian breweries.

SCOPE OF THE STUDY

The study will examine the capital budgeting techniques of the Nigerian breweries and will be able to established if there is any relationship between the budgeting techniques adopted by the firm with stated in the theory

LIMITATION OF THE STUDY

Limitation abounds in this type of study. So far the limitation encountered are as follows Access to the documents: experience has shown that apart from carrying out academic research in firm, it is also difficult to gain access to the document. This is because that firm has certain secrets commits to written which they will not like any other person to see. This was considered impediment to this study Time constraint: unlimited study on defilement areas for interest would have been conducted throughout the world if there were enough time for that. Time constraint was the most inhibiting factor which otherwise would have enable and extensive pursuit of knowledge in this area of interest in capital budgeting

Insufficient information: The researcher conducted interview in attempt to try to see some of the document. Document wanted were not obtained because of the interviewer fear for letting out the companies secret. Some oral information was difficult to get.

DEFINITION OF TERM

Capital budgeting: This is a long-term plan made for expenditure necessary to buy fixed asset for the production of the good and service

Finance: This is the term used to donate the acquisition and expending of fund to meet an economic unit objective

Cash flow: This simply means a flow of cash into a firm such as revenue from sale

Capital asset: This is asset of long-term nature used in the production of goods

Capital rationing: This is the allocation of scarce capital resources among competing economically desirable projects, which cannot be carried out to capital or other constraint

Ranking: This is the arranging of project in the order of their viability with reference to their evaluation result.

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