CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
An efficient economic system calls for a dependable mechanism to allocate its resources. Christy (1966) describes that land, labour and capital are to be directed to their best uses, and should hence be placed in the hands of those who can use them most capably. In a market economy, this allocation process consists largely of a set of private decisions, which are directed by a network of free markets and flexible prices . Important among these decisions are capital investments decisions that according to Northcott (1995) are vital at two levels: for the future operability of the individual firm making the investment, and for the economy of the nation as a whole. At the firm level, capital investment decisions have implications for many aspects of operations, and one exert a crucial impact on survival,profitability and growth. At the national level, the proper planning and allocation of capital investment are essential to an efficient utilisation of other resources,poorly placed investment reduces the productivity of labour and materials and sets a lower ceiling on the economy’s potential output. With this in mind it is no wonder that capital investment or capital budgeting is a central application of financial theory .the advantages and applications of sophisticated capital budgeting procedures based on cash flows, risk and the time value of money are seen as tools for maximising shareholders’ wealth, which is the same as maximising the value of the firm (Copeland & Weston, 1992). This fact is oen approximated to the relationship that firms using more sophisticated capital budgeting procedures should be able to perform better over time (Christy, 1966; Klammer, 1973). Empirical studies concerning the adoption of sophisticated capital budgeting procedures have shown that even though the degree of adoption has increased over time, there is an obvious “theory-practice gap” (Klammer, 1972; Schall, Sundem&Geijsbeek, 1978; and Graham & Harvey, 2001). The research therefore seek to evaluate the impact of capital budgeting on organizational performance
1.2 STATEMENT OF THE PROBLEM
Investment on capital project constitute a major financial budget of a firm. Therefore it is pivotal that it impacts positively on the firms performance in terms of profitability, market share,growth and shareholders value.
However many organization make huge capital investment without exacting Positive result on the firms operations.This is as a result of lack of proper Appraisal to determine the relative worth of such investment.Capital budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project’s lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target .Also known as “investment appraisal (http://www.investopedia.com/terms/a/appraisal.asp).Ideally, businesses should pursue all projects and opportunities that enhance shareholder value (http://www.investopedia.com/terms/s/shareholder–value.asp). However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.Popular methods of capital budgeting include net present value (NPV), (http://www.investopedia.com/terms/n/npv.asp)internal rate of return (IRR), (http://www.investopedia.com/terms/i/irr.asp)discounted cash flow (DCF) (http://www.investopedia.com/terms/d/dcf.asp) and payback period (http://www.investopedia.com/terms/p/paybackperiod.asp) Therefore the problem confronting the research is to determine the impact of capital budgeting on organizational performance.
1.3 RESEARCH QUESTIONS
1. What is the nature of capital budgeting
2. What constitute the nature of organizational performance
3. What is the impact of capital budgeting on organizational performance
4. What is the impact of capital budgeting in ondo state ministry of works
1.4 OBJECTIVE OF THE RESEARCH
1. To determine the nature of capital budgeting
2. To determine the nature of organizational performance
3. To determine the impact of capital budgeting on organizational performance
4. To determine the impact of capital budgeting on the performance of ondo state ministry of works
1.5 SIGNIFICANCE OF THE RESEARCH
The research shall provide an analysis of capital budgeting and the techniques applicable in capital budgeting tecniques. It shall serve as a source of information to managers and other professionals.