ABSTRACT
Capital budgeting
decision usually involves substantial’s expenditures on new assets. These
decisions are particularly important because the firm losses much of its
flexibility by looking into projects and because budgeting decisions define the
firm strategic direction. Capital budgeting in Ikorodu local government is very
vital and must be approached with all sense of diligence. This project is
intended to create awareness in capital budgeting in Nigeria local government.
The need for this study arises from the variation in capital budgeting in
Ikorodu local government that has been noticed and this research work hoped to
improve the standard. In order to achieve this, project has gone into so many
past works of authors and related literatures. The data for the study were made
up of primary data. Interviews and questionnaires were used for proper and
precise responses. The questions were of the closed type. This was done to
empower the respondents and chi-square was used to analysis the result.
Capital budgeting
decisions are made in terms of both quantitative factors (monetary measure of
costs and benefits) and qualitative factors (non-monetary measure of costs and
benefits). Capital budgeting decisions are particularly difficult in non-profit
organizations such as national and local government organizations, since it is
not always possible to precisely quantify the costs and benefits of a project.
The major findings that
emerge from the study can be summarized as follows:
i.
There is relationship between
effectiveness of Ikorodu Local government and optimal allocation of resources
ii.
There is relationship between
efficiency of Ikorodu Local government and optimal allocation resources.
iii.
Effectiveness and efficiency of
capital budgeting improve the revenue generation of Ikorodu Local government
From the above
mentioned summary of major findings, it is observed that capital budgeting is
very relevant to public sector organizations.
It was recommended that
capital budgeting aids planning of annual operations, co-ordinating the
activities of the various parts of the organization, communication of plans to
various responsibility centre manager, motivating managers to achieve
organizational goals. Control of activities and evaluation of the performance
or governmental institutions or government and its enable the management of
nonprofit organization to make more informed decisions about the allocation of
resources to meet the overall objectives of the organization.
TABLE OF CONTENTS
TITLE
PAGE 1
ABSTRACT 2
TABLE
OF CONTENTS 3
CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND TO THE STUDY 5
1.2 STATEMENT OF RESEARCH PROBLEM 8
1.3 RESEARCH QUESTIONS 8
1.4 OBJECTIVE OF THE STUDY 8
1.5 SIGNIFICANCE OF THE STUDY 9
1.6 RESEARCH HYPOTHESES 10
1.7 SCOPE AND LIMITATION OF THE STUDY 10
1.8 DEFINITION OF TERMS 10
REFERENCES 15
CHAPTER TWO: LITERATURE REVIEW
2.0 INTRODUCTION 16
2.1 CAPITAL BUDGETING? 17
2.2 CAPITAL BUDGETING DECISION 18
2.3 CAPITAL BUDGETING PROCESS 20
2.4 THE CRITERIA FOR INVESTMENT DECISION 21
2.5 IMPACT ON GOVERNMENT DECISION 26
2.6 THE ROLE OF LOCAL GOVERNMENT THROUGHOUT
THE PROCESS 27
2.7 THE CAPITAL BUDGET PROCESS IN IKORODU LOCAL
GOVERNMENT 28
2.8 ANALYSIS OF THE STUDY 30
2.9 CONCLUSION 31
REFERENCES 33
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 INTRODUCTION 34
3.1 RESEARCH DESIGN 34
3.2 SOURCES OF DATA 35
3.3 THE POPULATION OF THE STUDY 35
3.4 SAMPLING SIZE 36
3.5 QUESTIONNAIRE DESIGN 36
3.6 ADMINISTERING OF QUESTIONNAIRE 37
3.7 ANALYSIS TECHNIQUES 37
3.8 METHODOLOGY LIMITATION 38
REFERENCES 39
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION
4.0 INTRODUCTION 40
4.1 ANALYSIS OF PERSONAL DATA 40
4.2 PART II: THE RELEVANCE OF CAPITAL BUDGETING
ANALYSIS OF RESOURCES TO
QUESTIONNAIRE 44
4.3
TESTING
AND ANALYZING OF HYPOTHESIS 56
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 SUMMARY OF THE MAJOR FINDINGS 60
5.2
CONCLUSION 61
5.3 RECOMMENDATIONS 62
REFERENCES 64
QUESTIONNAIRE 66
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Budgeting occupies or plays a strategic or pivotal
role in every organization, be it public owned organizations or privately owned
organization. To this extent, the evaluation or role of capital budgeting
cannot be undermined because of its evaluation in financial decision.
Budgeting has been defined in different ways but it
means of the same or relatively the same by different authors, scholars and
schools of thought.
According to the Institute of Cost and Management
Accounting, Budgeting as a financial and quantitative statement prepared on
capital expenditure prior to a definite period of time of the policy to be
pursued for the purpose of attaining a given objective.
In the word of G.C Philipalys ‘Capital Budgeting’ is
concerned with allocation of firm’s care financial resources among the
available market opportunities.
In his own view, Omolehinwa (2005) explained that
Budgeting consists in planning, development of available capital for the
purchase of maximizing the long term profitability in the concern.
In general view, Budgeting involves all the processes
in the investment of resources in the long term projects in anticipation of
making profit or providing essential services to the public acquisition of
land, building, machinery and other capital projects.
More often than none, the resources of a nation or
society are not allocated to its component by the market forces or mechanisms
(prices) but by the public decision making means. The principles that guide the
allocation of the public resources ensure the resources are distributed in such
a way that the objectives of the public are accomplished through efficient and
effective budgeting system.
Also capital budgeting is the planning process used to determine whether
a firm’s long term investment such as new machinery, replacement machinery, new
plants, new products and research development projects are what pursuing capital
budgeting is the process of analyzing potential investment for the firm.
Capital budgeting decisions are probably the most important ones financial
managers must make. Capital budgeting decisions usually involves substantial
expenditures on new assets. These decisions are particularly important because
the firm loses much of its flexibility by locking into project and because
budgeting decisions define the firm’s strategic direction. Kinds of capital
budgeting proposals is as follows:
1.
Replacement/Modification of fixed assets- e.g. Worn out, obsolete
are replaced at appropriate time
2.
Expansion — involves an addition of capacity to existing
production facilities.
3.
Modernization of investment expenditure — they make it easier
for a firm to reduce cost and may coincide with replacement decision.
4.
Strategic investment proposal — these are budgeting decisions
which do not assume that the return will be immediate or measured over a long
period of time. Strategic investments are defensive, offensive and mixed motive
decision. The vertical integration of a firm is an example of defensive
investment in which a continuous source of raw materials is assumed. Horizontal
combinations are offensive investments for they ensure a firm’s internal and
external growth respectively. Mixed motive investments are outlays on research
and development programmes.
5.
Diversification of business — means operating in several
market or firm one market into another market it may even amount to changing
product lines.
6.
Research and development — where the techno1or is rapidly
changing, research and development area is a continuous activity in any firm
usually large sums of money are invested in research and development activities
which lead to capital budgeting decisions.
1.2 STATEMENT OF RESEARCH PROBLEM
This research work will focus primarily on
investigating and point-out the problems facing public owned organizations for
its inability to put in place efficient allocation of resources, equitable
distribution of income by the use of tax and stabilization of economy by the
use of capital budgeting and how it affects their service delivery to the
people, high lost an inadequate capital, poor human resources, unpredictable
social and economic factors bad policy formulation, sharp practices.
1.3 RESEARCH QUESTIONS
(1)
Does Capital Budgeting efficiently related to
public revenue at the Ikorodu Local Government?
(2)
Does Capital Budgeting correspond to capital
project from internal revenue drive in Ikorodu Local Government?
1.4 OBJECTIVE OF THE STUDY
This study aims of assessing the capital budgeting in
financial organization. Therefore the objective of this work will be carried
out as followed.
(i)
To evaluate the application of capital budgeting
in an organization.
(ii)
To examine capital budgeting and its effect on
financial performance of organization.
(iii)
To ascertain the usefulness of capital budgeting
in carry out the activities of organization.
(iv)
To point highlight the difficulties in the
application of capital budgeting system and suggest recommendation that will
bring improvement.
(v)
To examine how effective capital budgeting on
financial performance organization.
1.5 SIGNIFICANCE OF THE STUDY
This research study will endeavor to show how Public
Sector can go about putting its Capital Budgeting in place to bring desired
results to the people. Also, to contribute to the body of knowledge this will
be beneficial to the society at large.
As a policy instrument a capital budget might induce policy- makers to
think more about-ten” capital spending in light of the debates as to the
optimum level of the public capital stock. This is not say that a capital
budgeting might not lead to misuse, that large capital items might not be
considered in annual expenditure plans and hidden from public scrutiny, except
by knowledgeable analyst. In this respect, some of the political problems are
pertinent — that is, the starting point for a capital.
Capital Budgeting in Nigeria local Government is very vital and must be
approach with all sense of diligence.
The rate of economic development in the Nigeria local government has been
relatively slow due to continuing whiting down of their powers by the state
government and the state government has continued to encroach upon what would
normally have been exclusive preserves of local government at their most basic
levels. Fortunately, the picture is now different since the functions of local
governments, sources of revenue and other responsibilities have constitutional
backing. Therefore, the rate of economic development in the government to be
accelerated.
1.6 RESEARCH HYPOTHESES
(1) H0: Capital Budgeting system does not
improve allocation of resources efficiently in Ikorodu Local Government.
H1: Capital Budgeting improves
allocation of resources efficiently in Ikorodu Local Government
(2) H0: There is no corresponding capital
project from Internal Revenue drive in Ikorodu Local Government
H1: There
is corresponding capital project from Internal Revenue drive in Ikorodu Local
Government
1.7 SCOPE
AND LIMITATION OF THE STUDY
This research study will try to point out what is
obtainable in the Public Sector in terms of Capital Budgeting practices. This
research work will limit its scope to capital budgeting in Ikorodu Local
Government.
1.8 DEFINITION OF TERMS
Capital Budgeting: It is the processes in the
investment of resources in the long term projects in anticipation of making
profit or providing essential services to the public acquisition of land,
building, machinery and other capital projects.
Budget: is a plan for how much money you
have and how much money you spend. Sticking to a realistic budget allows you to
pay off your debts and save for the
proverbial rainy day
Accounting Rate of Return: The discount rate often used in
capital budgeting that makes the net present value of all cash flows from a
particular project equal to zero. Generally speaking, the higher a project's
internal rate of return, the more desirable it is to undertake the project.
Net Present Value (NPV): It is the aggregation of the present value of all
cash benefits by deducting the present value of all cash.
Profitability Index (PI): It is also known as the
‘Benefit Cost Ratio’ is the ratio of the present value of future cash benefit,
at the required rate of return to the initial cash outlay of the investment.
Limiting Factor: A limiting factor is anything that limits the
activity of an entity; examples of limiting factors are shortages of supply of
a resource and restriction on sales at a particular price. That is, the
limiting factor is the one factor that dominates all other factors that
limiting factor can be any factor that is important to the carrying of the
organizations activity.
Public Sector: The public sector is one of
the largest sectors of any economy, for example, it accounts for about 20 percent of the entire economy. It consists of national and local governments, their agencies, and their chartered bodies.
Monetary policy: is the process by which the
monetary
authority of a country controls the supply
of money, often targeting a rate of interest
for the purpose of promoting economic
growth and stability.
Public Revenue: it is the
study of public finance is the deep study of all finance operations related to
the state which is therefore concerned with complete income and expenditure of
public authorities and administrative structures that are adjusted with one
another.
Capital expenditure: are expenditures creating
future benefits. A capital expenditure is incurred when a business spends money
either to buy fixed assets
or to add to the value of an existing fixed asset with a useful life extending
beyond the taxable year.
Financial decision: This is a judgment made regarding the method of raising funds that will
be used to make acquisitions; it
is based on an entity’s ability to issue and service debt
and
equity securities.
Profitability: A class of financial metrics that
are used to assess a business's ability to generate earnings as compared
to its expenses and other relevant costs incurred during a specific period
of time.
Market forces or mechanism: Forces of demand and supply representing the aggregate influence of self-interested buyers and sellers on price and quantity of the goods and services offered in a market. In general, excess demand causes prices and quantity of supply to rise, and excess supply causes them to fall.
Sharp practices: Sharp
practice may include making misleading statements or threats, ignoring
agreements, improperly using process, or employing other tricky and/or
dishonorable means barely within the law.
Capital investment: The capital that
a company has invested or
can invest in itself. It is calculated by adding the company's long-term debt,
stock, and retained earnings.
It may also apply to an individual by adding his/her net worth and
long-term debt.
Economic development: The term development is being used in
various contexts and is being qualified as economic development, human
development, international development, democratic development, and social
development. In the present context, the first two terms merit special
attention.
Operating budgets: the Operating Budget
represents an estimate of future expenses, this is an accrual-based accounting
figure, and it is the Disbursements for Operating Expenses Budget, a component
of the Operating Expenses Budget, that drives a company's cash flows.
Topography:
is a field of planetary science
comprising the study of surface shape
and features of the Earth and other observable astronomical
objects including planets, moons, and asteroids.
Economic analysis: A systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in
achieving a specific objective under the given assumptions and constraints.
Capital rationing: a condition that exists when there is an
upper-dollar constraint on the amount of capital available
to commit to capital
asset acquisition.
Drainage: Soil that is heavy or clayish tends to drain poorly,
while soil that is mostly sand will drain rapidly.
Neither extreme is good for most plants, which is one of the reasons humus content
is vital to plants.
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