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This chapter introduces the topic “effectiveness’ of capital investment appraisal techniques which is also called “capital budgeting techniques” in financial institutions. The study seeks to executive how First Bank of Nigeria Plc applies its investment (s) appraisal techniques.
The first chapter deals with the background of the study statement of problems and the objectives of the study. This chapter also examines critically, the justification and relevance of the study, scope and limitation of the study and finally, plan of the study.
- BACKGROUND OF THE STUDY
Investment could be described as the setting aside of the certain proportion of income or profit to generate additional or future returns. It could also tensed as the induction of available financial and natural resources into the economy top enhance further growth and development.
Investment constitution a source of fund to the receiver of such funds while it is an application of fund the provider Both the providers and the receiver of such may be individual organizations, government and other national and international investors.
Investment can be done in two ways vis: equity and loan stock, investment is the commitment of present day funds and resources into projects, activists and aspect which are expected to yield income in the future capital investment can also be said to be ersoucres which are capital in nature and as such can not be easily converted to liquid cash within a short period of time. While stock investment is the purchase of shares or bond in limited companies which are in corporated under the law and duly registered on the floor of the stock exchange.
This shares or bonds are expected to yield dividends or interest either a fixed rates of varying rates depending on the nature of the shares or bonds for example ordinary shares yield vending fixed rate of interest wether the company declares profit or not, on the other hand, debentures yield fixed rate of interest whether the company declares profit or not.
Investment is divided into two namely, long term investment and short terns investment.
Long term investments are mostly used to fiancé capital projects and short term investment are mostly used to fiancée working capital shortage.
There are certain factors which influence capital investment decision; such factors as propensity to save rte of interest on saving net cash that is currency in circulation in the business environment rates of obsolesce in the productive fixed assets. The opportunity cost the financial risks and other uncertainties in the business environment and the profitability of the investment. These variables make article evaluation of investment alternatives necessary in order to maximize the wealth of the potentials investor.
The decisions on when and how to utilize the available financial resources is taken by proper investment appraisal. This can also be referred to capital budgeting which is the production of the cost an return on invested as well as investment of capital funds. It should be noted however that an elaborate investment as appraisal would be needed when dealing with many numbers of individual routine investments because the cost might not satisfy the means. For large companies, an elaborate appraisal is need, skillful and complex fact findings one involved these are often carried out by employing the service of experts.
It is imperative to emphasis the fact that an elaborate system of appraisal does not guarantee the source of an investment. Not withstanding, the decision. This is because the projections are made into the future in which a lot assumption is made. The decision based upon these evaluation techniques will give its management into maximizing the wealth of the share holders whose interest they represent, it is for this purpose that we are embarking on this study.
- STATEMENT OF THE PROBLEMS
Two broad problems arise with investment appraisal the first is the result of not applying capital investment appraisal techniques before making investment decisions the second problem is the inability of the management to apply the right method of appraisal.
These problems are better expressed as follows:
- Inability to develop alternative solution which may be due to lack of access to valid and reliable information about investment.
- Inability to complete on-going project, this problem is caused by misleading assessment of not ash flow and capital rationing.
- Problem of not considering the business environment factors during investment appraisal which include political governments/legal social, cultural and international factors during investment appraisal.
- The difficulties of absolute inability to determine the basic solution to the defined problems which might be due to the use of in appropriate investment techniques.
- Mistake of identifying symptoms for problems as the symptoms indicate the problems.
- OBJECTIVES OF THE STUDY
The propose of studying is to identify the need for investment appraisal and the procedures was to be applied by an organization for growth and development. This study shall also demonstrated the various capital investment appraisal techniques as adopted in First Bank Nigeria Plc and also review other capital investment appraisal techniques, their merit and demerits their assumption and critical for each at the techniques . The effect of the environment factors on the choice of investment appraisal techniques a comparison between these factors shall analyzed in this study.
- RESEARCH METHODOLOGY
The method which will be adopted in carrying out this study includes questionnaire and personal interview in some cases.
The source of data available for obtaining information for the purpose of this research are primary and secondary source which provide for all the necessary information needed as far as the research working concerned.
The information used in the research were from the main source. The first source is the use of questionnaire administered personally on the respondent.
The second source is an extensive interview of strategic management of First Bank of Nigeria Plc.
1.5 JUSTIFICATION AND RELEVANCE OF THE STUDY
This study shall be great important to individual and corporate bodies who are involved in capital investment decisions making. This study will be used in the evaluation of capital project.
These are projects with not only it will be useful in this area, but is will also assist management to make proper decisions in the case of mutually exclusive project. These are projects with different life span and capital rationing.
The study will also be importance to non financial experts as it will provide necessary guidance on how to gather the information from various source both internal and external to the organization in considering the financing and taxation implication to the project and decision making based on the analysis students who may want to have a practical in sight on how appraisal techniques are used in companies will also benefit tremendously from this study. The study is still relevant to students who might wants to carryout research work on this crucial topic.
- SCOPE AND LIMITATION OF THE STUDY
The scope of the study will cover significant aspect of capital budgeting including, the effects of inflation, taxation, risk, certainty and uncertainly and capital rationing on investment decisions. The limiting factors to this study are I adequate finance and non-availability of vital information which were confidential to the bank.
- PLAN OF THE STUDY
The first chapter of this study deals with the background of the study, statement of problems and objectives of the study, it also examines justification and relevant of the study, scope and limitation of the study’ plan of the study and definition of terminology.
The second chapter is a review of some relevant literate on the study. The review include the conceptual framework and discussion on existing studies third chapter deals with the history profile of the Organisation.this includes historical background of first Bank of Nigeria Plc, organization structure (chart) mission and vision c statement of the bank ad re-engineering strategy.
- DEFINITION OF TERMINOLOGIES
Investment appraisal: This can be defined a the study and analysis of various investment, alternatives with a view of selecting the cost option in which an organization can part away with its immediate funds in anticipation of an expected flow of future earnings over a period of years.
Cost of capital: This is the discount rate which when applied to a project cash flows streams would determine whether the project is worth while or not. If a project NPV (Net Present Value) is positive using the cost of capital as the discount rate, the project should be accepted if a projects NPV ids negative, suing the cost of capital as the discount rate, the project should be rejected.
Outlay: This refers to the cost to purchase or to maintain the necessary assets and to put them in use.
Initial outlay: This is the immediate cash out flow used to obtain the required assets and to put in use
Cash flow: It is a phrase meaning the actual movement of cash in and out of enterprises.
Cash flow or positive: Cash flow is the cash received that is found coming into the business from operation some example are, project revenue, government grant etc.
Cash of out flow: Otherwise known negative cash flow is the period out, this are expenditure that are in cured by investment in an organizations, some example are, initial cash outlay, labour cost, materials cost etc.
Net cash flow: It is the different between the total net cash in flow and total net cash out flow.
Risk: This is described as the possibility that the objectives may not be realized that is, the uncertainty as to the occurrence of an economic loss. Risk is unpredictability, the tendency that actual result may differ from predicted result. It is the possibility of an unfortunate occurrence. It is the change of loss example are, interest rate risk, risk of default, price level risk, business risk, finance risk, and market and operation risk.
Capital asset pricing model (CAPM): This is also used in calculating, it is a method used on calculating the cost of equity capital base on the need to adjust for risk. The model states that the required return on any project depending any of level of risk calculated.
Weighted average cost of capital (WACC): acting cost of capital. It shows minimum rate of return provide capital.