AN ASSESSMENT OF CAPITAL INVESTMENT DECISION IN BUSINESS ENTITY (A CASE STUDY OF GLOBAL SOAP AND DETERGENT INDUSTRY LIMITED ILORIN KWARA STATE NIGERIA)
TABLE OF CONTENTS
TITLE PAGE PAGE
CERTIFICATION I
DEDICATION II
ACKNOWLEDGEMENT III
TABLE OF CONTENTS V
CHAPTER ONE
1.0 INTRODUCTION 1
1.1 STATEMENT OF THE PROBLEM 2
1.2 OBJECTIVE OF THE STUDY 3
1.3 SIGNIFICANT OF THE STUDY 4
1.4 SCOPE OF THE STUDY 4
1.5 PLAN OF THE STUDY 5
1.6 RESEARCH METHODOLOGY 5
1.7 DEFINITION OF THE TERMINOLOGY 6
CHAPTER TWO
2.0 LITERATURE REVIEW 16
2.1 INTRODUCTION 16
2.2 CONTROLLING DECISION 20
2.2.1 ORGANIZATION DECISION 20
2.2.2 STAFF DECISION 21
2.2.3 MOTIVATION DECISION 22
2.2.4 THE EVALUATION DECISION 22
2.3 CAPITAL EXPENDITURE DECISION 23
2.3.1 SELECTION OF RELEVANT DATA FOR DECISION MAKING 24
2.3.2 USING COSTING DECISION MAKING 25
2.3.3 COMPREHENSIVE INCOME APPROACH 25
2.3.4 DIFFERENTIAL ANALYSIS APPROACH 25
2.3.5 FINANCIAL ACCOUNTING 26
2.4 IDENTIFY RELEVANT DATA FOR SPECIAL DECISION 26
2.4.1 PURCHASING A NEW EQUIPMENT 27
REFERENCES 37
CHAPTER THREE
RESEARCH METHODOLOGY 38
3.0 INTRODUCTION 38
3.1 SAMPLE SIZE 39
3.2 SAMPLE TYPE 39
3.3 HISTORICAL BACKGROUND OF THE STUDY 40
3.4 METHOD OF GETTING DATA (PRIMARY AND SECONDARY) 42
CHAPTER FOUR
DATA PRESENTATION ANALYSIS AND INTERPRETATION 45
4.1 INTRODUCTION 45
4.2 CAPITAL BUDGETING DECISION 46
4.3 SCREENING TESTS 48
4.4 THE NET PRESENT VALUE METHOD 48
4.5 CALCULATION OF IRR BY LINEAR NTERPRETATION 54
CHAPTER FIVE
SUMMARY CONCLUSION AND RECOMMENDATION
5.0 SUMMARY OF FINDING 56
5.1 CONCLUSION 57
5.2 RECOMMENDATION 58
5.3 LIMITATION OF THE STUDY 59
BIBLIOGRAPY 61
CHAPTER ONE
1.0 INTRODUCTION
Capital investment decision is a business entity is a function of the top management in an organization the taking of decision to in primary is predetermination of organization goal and constant evaluation of the feasible strategies used for attainment of goals and objective. This decision involves the commitments of capital into investment or projects that have long term span, or allocation of capital to long term asset, that would yield benefit in the future. Due to the fact that future benefits are uncertain, investment decision involve risk and uncertainty. Therefore investment proposals should be evaluated in terms of both return or profit and risk, these two factors affect the firm’s market value.
The process of planning and managing a firm’s long term investment is referred to as capital budgeting, which would be treated later in this book. One of the function of the financial manager is to evaluation the expected cash inflows, that is cash expected to receive from investment when the cash is expected (the time )and compare it with expected cash outflow, that is expenditure on the investment. Also the financial manager is expected to evaluate the size, timing and risk of future cash flows before the final selection of investment/ projects.
This Procedure involves the lower management level whose const functions is to evaluate project to provide profitable in formations which forms the basis for judgment by the top management in under taking their function in progressive circle of planning evaluation and control of investment proposals for the attainment of organization goals.
1.1 STATEMENT OF THE PROBLEMS
Management is faced with a lot of problem in it’s capital investment decision making such problem include
a. to make or buy decision
b. to purchase a new machine or replace the old one
c. to introduce a new product or to cancel the formal product line
d. whether to sell off or process farther
e. price fixation on a special order e.t.c
since there exist many alternative course of action or techniques managers are expected to evaluate and use the various available strategies in order to get most profitable alternative.
Also managers are faced with such implementation problem such as:
i Determination of adequate amount of capital expenditure for each project work
ii The control needed to meet up the product start
iii The control required to meet the target time
1.2 OBJECTIVE OF THE STUDY
In carrying out such function managers are faced with risk and consequently to meet the required production standard and loss of profit.
Failure to achieve such organization goal head to liability to stand amongst industrial competition and consequently to short down the industry.
There fore, the aims of this research work is to look at strategies and criteria adopted by global soap and detergent manufacturing company which have resulted into their success or failure and to make reach in to writer text to enable researcher recommend profitable techniques for selecting investment implementation.
In this research works, the each have explained and example the techniques for selecting relevant data for
investment proposal and evaluate of controls adopted by Global manufacturing company and recommendation of writers of textbook and class lectures are also explained in this work.
1.3 SIGNIFICANCE OF THE STUDY
This topic chose for this research work is vast the researcher in much interested in this project topic to enable him to look in to the causes of success and failure of present system in business entities
However, a vigorous resource work has to be undertaken to enable the researcher achieve predetermined objects.
Moreover, Global soap manufacturing company are of the surviving business entities in this action data necessary for the study. Information and data necessary for the purpose of this destination.
This has tremendously economized the scare resource of time and money with the effort to audit the
capital investment affairs and managerial decision function to the company.
1.4 SCOPE OF THE STUDY
This research study is restricted to Global manufacturing company of Asa Dam Road, Ilorin Kwara State. Another laminating factors is the time allowed to complete and submitted factors is the time allowed to complete and submitted the project work. The time is so short that some aspect of the research study can not be covered.
Also money plays a crucial role in limiting the scope of this project. The research finds the economic enrolment hard to clear with that he can not extend up exception. The research has covered such a wide area in the aspect of selecting relevant data for project evaluation and used for time value of money factored for acceptance of alternative project.
1.5 RESEARCH METHODOLGY
In this study information was collected both from primary and secondary sources. The primary source of this study are responses of questionnaire send to respondent selected from the manufacturing comparing and same causes the personnel interview conducted.
The secondary data used magazine, school journals, relevant text books material from university of ilorin library and kwara state polytechnic ilorin
1.6 PLAN OF THE STUDY
The research work has been such divided in to the following chapter one will contain the introduction of the study, statement of the problem, objective of the study, important of the study, and finally determination of the terminology.
Chapter two will contain literature review and reference chapter three will also contain historical background of the
study, method of gathering data (primary & secondary data)method of data analysis.
Chapter four will contain data presentation analysis and interpretation. Chapter five will also contain the summary of the study conclusion, recommendation and limitation of the study.
1.7 DEFINATION OF TEMILOLOGY.
Accounting rate of return area:- is a measure used to evaluate investment proposal that is computed by chiding accounting net income for a project (revenue minus cost including depreciation and income taxes ) by the average net environment in the project it is also called simple rate of return.
AUDIT OF CAPITAL BUDGETING PROJECT:-
The following up practice of company the actual result of an investment project with its expected result. It used for control purpose and decision in making during the
project life line when modification may be indicated cost of capital.
The combined weighted average rate of cost that is firm incomes on its long term preferred stock and common stock.
CAPITAL BUDGETING:-
The planning and financing of long investment such as buying equipment and introducing new products.
CUT OFF RATE:-
The minimum rate of return an investment must propose before a firm will commit its resource to the investment. Also called the handle rate or target rate of return.
DISCOUNT RATE:-
The investment used to find the present value of a future cash flow.
DISCOUNT CASH FLOW MODEL:-
This is the techniques used to evaluate investment project that applied the time value of money to all cash flow and out flows by discounting them to their present values. The most two commonly use discount cash flow model are the net present value (NPV) method and the internal rate of return (IRR) method.
HARD DATE :-
These are the information that may be ascertain with high degree of precious and for which uncertainty is either small or non existent.
INTERNAL RATE OF RETURN
Is the rate of interest that produces a zero net present value when a projects discount cash operation advantage is not against discounted net investment.
LINEAR INTERPOLATION:-
This is a proportion (fraction) calculation made to estimate of project internal rate of return when present value factors falls between two figures shows in the present value table.
NET PRESENT VALUE METHOD :-
Is the amount available after subtracting the discount net investment from discount cash. If the amount is positive the investment proposes more than the discounted rate use to evaluate and the proposal. If the amount is negative the reserve is return and the project should be rejected.
NET PRESENT VALUE METHOD:-
Is the amount available after subtracting the discounted investment from discount cash. If the amount is positive the investment promises more that the discounted rate use to calculate and the proposal. If the
amount is negative is return and the project should be rejected.
PAYBACK PERIOD :-
The second phase of capital budgeting in which the investment that have surviving the screening process are subject to ranking criterion with result in the election of the most factorable projects for given amount of capital to be invested.
PROFITABILITY INDEX
The ratio obtained by dividing investment discount cash inflows by the required net investment. The competing project may be ranked by their probability index. The higher the profitability index the more desirable the project.
SCREENING
The initial phase of capital budgeting in which a specific cut – off criterion in used to eliminate unprofitable or high risk invest proposal.
CASH OPERATING ADVANTAGE
The cash effect of the different in cash operating cost as a result of contemplated change in a firms operation in which the net operating income for each alternative is computed and compared. All revenue and cost are considered even those that are the same for each alternative.
COMPETITORS BASE PRICING
Pricing product to compete with a competitions price and their assessing whether or non the product can be manufacture of the cost that will yield a satisfactory profit.
CONSTRAINT
A limiting factor such as available machine hours available direct hours, or available direct labor hours.
Cost plus pricing:-
A form of mark up principle which a predetermine percentage of a product cost is include in it selling price to cover the sellers operating cost income taxes and a reasonable period.
DEMAND ORIENTED PRICING:-
Pricing product by using a higher price when demand is high and lower price whom demand is low.
DIFFERENTIAL COST:-
Method of assessing the effect on point of contemplated in operations only revenue and cost that differ among the alternatives are considered.
IRRELEVANT COST:-
Cost that do not affect the decision to be made such as sunk cost that are the some for each alternative under consider.
JOINT PRODUCT COST:-
This is the cost of accounting and processing a single raw materials up to the split off the joint product.
MARKET PENETRATION PRICING:-
Setting the initial price of a new product low enough to immediately captive a care share of the market
MAKE UP PRICING:-
The inclusion of a pie determined percentage in a products price to cover the sellers operating cost income and taxes and reasonable profit. The markup percentage may be4 on either the items cost or its final selling price
RELEVANT COST:-
There are costs that differ among alternative and will influence the outcome of the decision making process.
SEPARATABLE COST:-
The cost that is incurred when processing of joint project after the split off point.
SKIMMING MARKET
This is the setting of price of a product high enough to get a small share of the market initially and than lowering the price to tract more customer for a longer share of the market.
SLIPT OFF POINT:-
The stage in the production process at which joint changed by any future action
TARGET RETURN PRICING:-
This is the method of setting the price of a product so that a pre-determined amount will be earned an investment.
FEED BACK:-
Is the information obtained by comparing actual results to pre-determined plains.
GOALS:-
A specific statement of the aim toward which a company intends to direct it effects.
MASTER STRATEGY:-
The entire pattern of a company’s basic mission purpose, objective polices and specific resources development
ORGANIZING:-
The combine and arranging of human material resource in a system of activities that will attain desired goals.
PLANNING:-
Dealing what objectives to purse during a future time period and what to do in order to achieve those objectives.
MOTIVATING:-
Directing and channeling human behavior toward the accomplishment of company’s goals.
PLANNING AND CONTROL CIRCLE:-
Is the continuous loop of planning, using feedback to evaluate result, taking corrective actions, if necessary and returning to the planning stage. The planning provides the mechanism by which plan is revised if necessary for the next cycle.
SHORT TERM PLANNING:-
A short term planning decision making process that include setting objectives that are consistent with long term goals and selecting means of which he objectives will be altered.
STAFF FUNCTION:-
The process of securing and developing personal for the jobs that are created during organized process.
STRATEGIC PLANNING:-
A long term decision marking process that includes setting the means by which goals will be at tamed.
STRATEGY:-
The method use to purse goals.
TREASURER:-
Is the financial office of a firm whose duties include custodian ship of the company’s hands, banking arranging
for financing, stoke hold relations insurance coverage and extension of credits.
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