CAPITAL BUDGETING IN THE PRIVATE SECTOR
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CAPITAL BUDGETING IN THE PRIVATE SECTOR
Chapter One: Introduction to Capital Budgeting in the Private Sector
Business firms typically have a vested interest in assessing their performance over a specific timeframe, which consequently prompts the compilation of a profit and loss statement.
Additionally, they inquire about their status at a certain moment, which afterwards prompts the preparation of a correct balance sheet. Ultimately, the desire to ascertain their intended destination prompted the formulation of a budget.
Budgeting is a concept that is commonly employed by individuals over extended periods of time. Many individuals have often conflated the concepts of budgeting and planning, leading to confusion and misunderstanding.
A beget is an integral component of a strategic blueprint. A plan has the capacity to be articulated in both financial and non-financial terms. A budget refers to any plan that is expressed in monetary terms. A budget can be concisely defined as a formal declaration of planned financial activities.
In the realm of financial management, firms employ several forms of budgets as a means of effectively allocating resources and planning for future expenditures. The budget encompasses several components such as the capital budget, sales budget, cash budget, and others.
The act of formulating a capital budget is commonly referred to as budgeting. Capital budgets are financial plans that are developed for the purpose of acquiring and expanding fixed assets over an extended period of time. Numerous companies currently engage in the process of formulating a capital budget.
The genesis of this practise may be traced back to the United States of America (USA). Prior to the onset of the Second World War, it was widely adopted by firms across the country.
Following the conclusion of the second war, numerous firms recognised the necessity of implementing strategic capital expenditure planning, resulting in its ubiquity in contemporary times.
Nigerian Brewery Limited, like with other beverage companies, actively engage in the practise of formulating budgets for their capital expenditures. However, this task is not straightforward as it is riddled with numerous challenges.
The purpose of this study is to identify and analyse the problem at hand.
The primary objective of establishing a private enterprise is to generate sufficient sales income to offset both fixed and variable costs, while also yielding a profit substantial enough to validate its continued operation. Nigerian brewing Limited, being a privately-owned firm, operates within the brewing industry with the primary aim of maximising profitability.
Breweries around Nigeria have had significant returns on their investments due to the exportation of their products to neighbouring African countries, as well as the high rate of beer consumption within the country. This occurred before to the year 1982.
The implementation of several rigorous economic measures following the year 1982 sought to rejuvenate the nation’s overall economic condition, which posed numerous challenges for the brewing industry as well. In order to engage in production, firms in the brewery business, including Nigerian Brewery Limited, acquire fixed assets and raw materials.
This acquisition is predicated upon the projected demand. The current estimation of the demand for beer is hindered by the overall increase in price levels. The increase in the overall price of beer has prompted consumers to alter their consumption patterns, leading to a decrease in the demand for beer as a result of its perceived non-essential nature.
The Nigerian Breweries Limited is currently facing challenges in its capital budget due to the uncertainty around the rate at which the demand for beer is decreasing. This uncertainty is particularly problematic because any changes in demand directly impact the company’s production capacity.
In addition to the capital budgeting challenge arising from uncertainties around changes in demand, there exists a further issue pertaining to tariffs and import restrictions imposed on the acquisition of fixed assets and spare parts. The unique issue has significantly contributed to exacerbating the challenges faced by the company.
The Nigerian brewers have also sought other methods for acquiring the fixed assets required for their production and operations. Even when fixed assets are sourced from abroad, they often see a rise in price due to import tariff restrictions. The presence of uncertainty has resulted in a significant budgetary challenge.
The rise in prices for fixed assets due to import restrictions, coupled with the restricted financial capacity, has led firms such as Nigerian Breweries restricted to prioritise the projects they intend to undertake. I had a challenge in the process of selecting a project that addresses the human problem within the organisation, which we are about to undertake.
The issue of selecting the most suitable option is a recurring challenge that is specific to each every project. One of the challenges encountered in the project pertains to the selection of the human factor, specifically the authenticity of the state of mind of the individual responsible for capital budgeting.
Due to the limited financial capacity. Nigerian Brewery Limited opted for external sources of financing for its capital project. The sources of external finance encompass commercial banks and trade creditors. In addition, there are several financial institutions. Financial institutions, including banks, impose interest on the funds they lend to borrowers.
The fluctuations in interest changes were observed to be closely linked to the corresponding changes in the economic environment. The ever-changing nature of the economy and its subsequent impact on interest rates necessitates the need for conducting cost-benefit analyses in capital budgeting.
Despite significant progress in addressing the issue of ability, there still persists the challenge of acquiring the required foreign exchange for remitting the exporters’ change rate. The rate exhibits a lack of stability. The presence of uncertainty poses a challenge for the field of capital budgeting.
The objective of this study is to determine the purpose.
The objective of the study was to ascertain the following.
This study aims to investigate the use of capital evaluation approaches by the management of Nigerian breweries for project evaluation.
2. Determine whether a thoroughly assessed project will generate a satisfactory return on investment for the investor.
3. Identify other factors that influence the decision-making process for picking projects to invest in.
The budgeting process capabilities within Nigerian Brewery Limited.
The study holds significant importance due to its potential contributions to the existing body of knowledge in the field.
Capital budgeting plays a crucial role in the productivity and economic viability of any economy due to a multitude of factors. One element that can be considered is the loss of flexibility.
The information presented in this text has been sourced from the book “Essentials of Management Finance” authored by J.C Wilson and E.A Brighton.
Following the allocation of funds to a project, there exists a correlation between the expansion of assets and the appropriate timing of sales, which determines the availability of capital assets and the quality of assets acquired.
Specifically, it is crucial to note that expenditures on certain funds are not automatically accessible, and insufficient equipment can lead to the failure of a firm.
The capital budget is a critical component of strategic decision-making in financial management, namely in the acquisition of fixed assets. Firms allocate significant amounts of capital to this process. The outcome of his financial investment persists over an extended duration, leading to a later reduction in the ability to make flexible decisions.
In addition to the reduction in flexibility over time, the expansion of fixed assets is consistently associated with future sales, which are also subject to forecasting. The acquisition of an asset with a projected economic lifespan of five years necessitates a corresponding projection of sales to be generated within the same time frame. Consequently, the lack of precise forecasting leads to inadequate investment in the fixed asset.
The findings of this research will hold considerable importance for the management of Nigerian Breweries Limited, as they grapple with the challenges associated with capital budgeting decision-making.
Moreover, this will hold considerable importance for investors seeking to engage in capital projects.
Ultimately, this will hold similar significance for other researchers and scholars who may have an interest in conducting subsequent investigations pertaining to the subject matter or its associated field.
The purpose of this study is to propose a hypothesis.
Hypothesis: The evaluation methodologies employed by the company’s management are sufficient for facilitating effective decision-making.
Hello, it appears that the evaluation methodologies employed by the organisation are insufficient for facilitating effective decision making.
The null hypothesis posits that the assessment of the capital project holds no significance within the context of Nigerian breweries.
The significance of evaluating a capital project is deemed to be negligible within the context of Nigerian breweries.
The scope of this study refers to the boundaries and limitations within which the research will be conducted. It defines the specific aspects, variables, and parameters that will be examined in order to achieve the research objectives.
This study aims to analyse the capital budgeting procedures employed by Nigerian brewers and determine whether there exists any correlation between the firm’s budgeting techniques and those outlined in existing theoretical frameworks.
One potential limitation of this study is the small sample size. The study only included 50 participants, which may not be representative of the larger population. This limited sample size reduces the generalizability of the findings
This study is characterised by numerous limitations. Thus far, the encountered limitations are as follows.
Access to documents: Empirical evidence suggests that, in addition to conducting scholarly investigations within a company, obtaining access to relevant documents might be a significant challenge.
This is due to the fact that the firm possesses confidential information that is documented and intended to remain undisclosed to any unauthorised individuals. This factor was regarded as a hindrance to the progress of the study.
If sufficient time were available, an extensive study on defilement areas of interest would have been undertaken worldwide without any limitations. The primary impediment to a comprehensive exploration of knowledge in the field of capital budgeting was the limitation imposed by time.
The available data is inadequate.
The researcher conducted interviews in an attempt to gain insight into the contents of the document. The desired documents were not acquired due to the interviewer’s apprehension regarding the potential disclosure of confidential information pertaining to the company. Obtaining certain oral information posed challenges.
The term in question is defined as follows.
Capital budgeting refers to the strategic process of allocating financial resources towards the acquisition of long-term fixed assets that are essential for the production of goods and services.
Finance refers to the concept including the allocation and utilisation of resources in order to fulfil the objectives of an economic entity.
Cash flow refers to the movement of cash into a business entity, typically in the form of revenue generated from the sale of goods or services.
A capital asset refers to a long-term asset that is utilised in the creation of goods.
Capital rationing refers to the process of distributing limited capital resources across several economically viable projects that are unable to be executed due to capital or other constraints.
Ranking refers to the process of organising projects based on their level of feasibility, as determined by their evaluation outcomes.
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