CHAPTER-1 Introduction

1.1 Overview

1.2 Meaning of capital budgeting

Capital budgeting is long-term planning for making and financing proposed capital out lays, it is
concerned with allocation of the firms scarce financial resources among the available market
opportunities. The considerations of investment opportunities involve the comparison of the
expected future streams of earnings from a project with immediate and subsequent streams of
expenditure for it.

1.3 Statement of the problem

The main purpose of setting up a private firm is to achieve enough sale revenue that will cover
the fixed and the variable cost as well as live some profit to justify its existence. The introduction
of many economic measures after the year 1982 aim at revamping the nations economic comes
with many problem with which the brewery industries are not left out.

1.4 Purpose of the study

1.5 Features of capital budgeting

The important features, which distinguish capital budgeting decision in other day to day
decision, are:

Capital budgeting decision involves the exchange of current funds for the benefits to be achieved
in future

The futures benefits are expected and are to be realized over a series of years.

The funds are invested in non-flexible long-term funds.

They have a long term and significant effect on the profitability of the concern.

They involve huge funds.

They are irreversible decision

1.6 Objectives of capital budgeting

The general objectives of capital budgeting are

To determine the product scope, capital budgeting lets project planners define the financial scope
of a project.

To determine funding sources and how much money will be needed form each source and the
costs associated with using that funding method.

To control project costs, capital budgets act as control document throughout the life of the
project.

To determine payback time, an important element of capital budgeting is determining the project
time.

While the objective of this study is to find out the following.

To find out the extent to which capital evaluation techniques are used by the Nigeria breweries
management in evaluating their projects.

To find out whether evaluated projects will yield adequate return for the investors.

To determine the factor that influence the selection of project to be invested in .

To determine the extent in which evaluation of capital important in Nigeria budgeting.

To find out if appropriate selection of human factory, is the fidelity of the capital budgeting.

1.7 Significance of capital budgeting

The outcome of the research work will be significant to the management of the Nigeria breweries
Limited who is faced with capital budgeting decision problem. Furthermore, it will be significant
to the investors who wish to invest in capital project.

Finally it will equally be important to other researchers and scholars who may wish to carry out
further research on the subject matter or on the related topic.
SIGNIFICANCE OF CAPITAL BUDGETING

 Capital budgeting is an essential tool in financial management

 Capital budgeting provides a wide scope for financial managers to evaluate different
projects in terms of their viability to be taken up for investments
 It helps in exposing the risk and uncertainty of different projects
 It helps in keeping a check on over or under investments
 The management is provided with an effective control on cost of capital expenditure
projects
 Ultimately the fate of a business is decided on how optimally the available resources are
used

1.8 Importance of capital budgeting

The importance of capital budgeting can be understood form the fact that an unsound investment
decision may prove to be fatal to the very existence of the organization. The importance of
capital budgeting arises mainly due to the following.

Large investment: Capital budgeting decision, generally involves

Large investment of funds. But the funds available with the firm are scarce and the demand for
funds exceeds resources. Hence, it is very important for a firm to plan and control its capital
expenditure.

Long-term commitment of Funds: Capital expenditure involves not only large amount of funds
but also funds for long-term or permanent basis. The long-term commitment of funds increases
the financial risk involved in the investment decision.

Irreversible nature: The capital expenditure decisions are irreversible in nature. Once, the
decision for acquiring a permanent asset is taken, it becomes very difficult to dispose off the
assets without incurring heavy losses.

Long-term effect on profitability: Capital budgeting decision has a long-term and significant
effect on the profitability of a company. Not only the present earning of the firm are affected but
also the future growth and profitability of the firm upon the investment decision taken today.
Capital budgeting has utmost importance to avoid over poor under investment in fixed assets.

National importance: Investment decision though taken by individuals concern is of national

importance because it determines employment, economic activities and economic growth.

1.10 Definition of terms

1.11 Risk and capital budgeting

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CHAPTER-2 Research Methodology

2.1 Background of the study
Every business firm normally will like to know how it perform over a period of time this leading
to a preparation of profit and loss statement. They also ask about their position at a particular
point in time, which lead them to the preparation of budget. A budget can be seen as a document
or financial document used to project future income and expenses. In budgeting there are types
of budget prepared by the firms, such as capital budget, sales budget and cash budget and so on.
The process of preparing capital budget is called budgeting. Capital budget are long-term budget
made for acquisition and expansion of fixed asset. Many firms prepares capital budget today, it
was originated in the United states of America (U.S.A). In America it was applied by all firms
before the second world war. After the second World War many firm saw the need to plan for
capital expenditure, hence it is prevalence today. The Nigeria brewery limited and other beverage
are not left out in the train of firm that prepare budget for its capital expenditure. The process of
capital budgeting is vital to any responsible, well managed business. if that business is public and
owned by public shareholders, the budgeting process becomes more crucial, since shareholders
can hold management accountable for accepting unprofitable projects that can have the effect of
destroying shareholder value. The decision of whether to accept or deny an investment project as
part of a company’s growth initiatives, involves determining the investment rate of return that
such a project will generate. Capital budgeting is also vital to a business because it creates a
structured step by step process that enables a company to develop and formulate long-term
strategic goals, seek out new investment projects, estimate and forecast future cash flows,
facilitate the transfer of information and creation of decision. Capital budget however is not easy
as it is fought with a lot of problems.

2.2 Research Hypothesis

The hypotheses of this research are stated below:

HO: Nigerian breweries managements does not use capital evaluation techniques in evaluating
their project.

HA: Nigerian breweries management use capital evaluation techniques in evaluating their
project.

HO: Evaluated project do not yield adequate return for investors.

HA: Evaluated project yield adequate return for investors

Ho: There are no other factors which influence the selecting of project to be invested in

HA: Ho: There are other factors which influence the selecting of project to be invested in

HO: Evaluation of capital is not important in Nigeria budgeting.

HA: Evaluation of capital is important in Nigeria budgeting.

Ho: Appropriate selection of human factory is not the fidelity of the capital budgeting

HA: Appropriate selection of human factory is the fidelity of the capital budgeting

2.3 Scope of the study

The study will examine the capital budgeting techniques of the Nigeria breweries and will be
able to establish techniques adopted by the firm stated in the theory. The study will also examine
the extent in which evaluation of capital important in Nigeria budgeting and also whether
evaluated projects will yield adequate return for the investors.

2.4 Types Of capital budgeting decision

There are many ways for classifying investment. One of the classifications according to
Benjamin C. Osisioma (2000) is as follows:

Replacement: Decision necessary to replace worn-out or damage equipment fall in the group.
The purpose of such investment decision is to lower maintenance cost, minimize the decision to
lower the maintained cost, minimize the marketing cost and labor cost and other variable cost
item like the electricity bill.

Expansion of the existing product or market: Included in those categories is the expenditure to
increase the output of the existing products or to expand outlet of the existing products or to
expand outlet or the distribution facility in marketing new product being selected.

Environmental Safety Regulation: This involves expenditure necessary for the compliance with
the government regulation, labour union requirements and the condition of the insurance policy.
This are usually referred to as mandatory investment and non-revenue yielding project.

Miscellaneous expenditure: These include expenditure on office building, packing lost and
similar cash outlays based on the interrelationship among proposed project.

Benjamin C. Osisioma (2000) further classifies investment decision as;

Independent projects: This exists when acceptance or the rejects of the project does not affect the
cash flow of another project. In other words, proposed budget save different purpose and do not
compete with each other.

Dependent Projects: This is the reverse of the independent projects, it occur whenever the cash
flow of a project affects or is influenced by the cash flow of another project and may appear in
the following situation.

i) Mutually exclusive project: If the acceptances of one project include the acceptance of another
project. The two projects are mutually exclusive project.

ii) Complementary projects: If the acceptance of one project enhances the cash flow of another
project. The two projects are complementary.

iii) Prerequisite of contingent project: If the acceptance of one project depends upon the prior
acceptance of another project, the acceptance of the former is the prerequisite to the acceptance
of the latter.

iv) Mandatory project: This is the project that must be accepted if the firm must remain in the
business. The telephone manufactured the receiver, cable and other component parts.

v) Discretionary Project: These are project that are acceptable only if they are financially
attractive

2.5 Source of data

2.6 Long term financing

2.7 Problems of capital budgeting decisions

Douglas Garbatto (2002) said that manager who is budgeting for capital expenditure are traced
with whole series of problem which can be dealt with under this headings.

The demand for capital

The supply of capital

The timing of investment

The researcher decided to write using the above heading in addition to other. The first to be
treated is the demand for capital or financial capital as J.F Weston and E.F. Brigton (2006) has it

The demand for capital (financial forecasting): Him Levy and Marshall Sarnat (2003) stated that
at the end of every year, every company would like to know what their next year income
statement and balance sheet would look like, with regard to this reach department of the
company will like to estimate its total requirement for the next year operation, they stated also
that they will need to know how many additional machine will be required J.F Weston and E.F.
Brighton agree with the view made by Haim Levy and Marshall Sarnat but add this to often
necessitate by increase in the sale forecast.

The supply of capital: There are many source of capital to meet the financing of capital asset
needed for the increasing, such sources of fund include the bank, financial and insurance
companies to mention but few. Fund can be raised from the sourcing of common stock, preferred
stocks, bonds, convertible bonds and so on. The firm can also make use of the retain earning
where it is much to finance its capital project.

The timing of investment: Don T. Decoster et al (2008) said that after the funds has be expanded
the project is put in services as well as the rounded capital expenditure programmed will focus
on a positive audit of the investment Charles T. Horngren and George Foster (2007) with the
above statement. Both set of auditing is guided by the following reasons (integrated) for post
auditing investment in capital project.

i. It foster a sense of responsibility in the originator of capital investment program.

ii. To see that spending and specific conform to the plan as approved.

iii. To increase the likelihood that capital spending request are sharply conceived and honestly
estimated.

iv. To direct the management intention to the unsuccessful project so that additional action may
be taking to attain the placed performance.

v. To improve the estimation on the future capital building projects.

vi. To gain experience in evaluating, selecting and approving future capital expenditure proposal.

2.8 The problem of change in the demand of beer

In order to produce, firms in the brewery industry including (The Nigeria brewery limited)
acquire fixed assets as well as raw material. This acquisition is based on the expected demand.
The demand of beer cannot now be fairly estimated because of the general rises in the price.
General rise in the price of beer has made the customers to shift their demand to other goods.
These bring about decrease in the demand for beer. The uncertainty surrounding the continuance
rate at which the demand of beer decrease has become of the problem encountered by the capital
budget especially by the Nigeria breweries limited since the capacity of the production is always
affected by the change in the demand of product.

The problem of tariff and import restriction on the importation of fixed asset and the spare parts

It has made the firm like the Nigeria brewery limited look of alternative way of obtaining fixed
asset necessary for its production and operation. It often increased the price for them as a result
of the import tariff restriction. The uncertain surrounding this has made capital budget a problem.

The problem of appropriate selection of human factory which is the fidelity of the capital
budgeting

The problem encountered in the external source of financing in its capital project.

The external source of financing included the commercial banks, trade creditors and some
financial institution. Banks and other financial institutions charges interest on the money that
they lend out, interest charges fluctuated with the changes in economic setting. Due to the
dynamic nature of the economic with consequent effect on the interest rate, it is problem making
cost benefit analysis, necessary in the capital budgeting. The rate is never stable. The uncertainty
include in this makes a problem for capital budgeting.

Problems on knowledge of the techniques in project evaluation.

2.9 Techniques use in capital budgeting decision

There are many techniques or methods used in investigating the use of capital in capital project.
These methods include pay back period, net present value, internal rate of return, accounting rate
or simple rate of return and profitability index.

Payback period method: These refer to the period of time required for the return on investment to
repay the sum of the original investment for example, a N1000 investment which returned N500
per year would have a two year pay back period. The time value of money is not taken into
account. Payback period intuitively measures how long something takes to pay for itself.
Payback period as a tool of analysis is often used because it is easy to apply and easy to
understand for most individuals regardless of academic training or field of endeavor.

Net Present Value Method: This is the difference between the present value of cash inflows and
the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability
of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that
an investment or project will yield. Douglas Garbult (2002) said that the present value of a
project is found by discounting all future cash flow at a stipulated discount rate.

Internal rate of return: This is the discount rate often used in capital budgeting that makes the net
present value of all cash flows of 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. as such
internal rate of return (IRR) can be use to rank several prospective projects a firm is considering.
Assuming all other factors are equal among the various projects, the projects with the higher IRR
would probably be considered the best and undertaken first.

Accounting rate or simple rate of return: This is another method in capital budgeting technique
that does not involve discounted cash flow. Unlike the other capital budgeting method, the
accounting rate of return method does not focus on cash flows rather it focuses on accounting net
operating income. The approach is to estimate the revenue that will be generated by a proposed
investment and then to deduct from these revenues of all the projected expenses associated with
the project.

Profitability Index (P.I.): This is also known as profit investment ratio (P.I.R) and value
investment of a proposed project. It is a useful tool for making projects because it allows you to
qualify the amount of value created per unit of investment. Charles T. Horngren and George
Foster (2007). Pointed out that some author use the profitability index in ranking project in the
ascending order of profitability. The profitability index is the total value for the future; stated that
if the capital rationing does not exist and if there are mutually exclusive or indivisible project,
the ranking by index and net present value will produce the same answer.

2.10 Limitations of capital budgeting

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 CHAPTER-3 Review of Literature
3.1 INTRODUCTION
capital budgeting originated from the united state of America. It was applied by all firms before
the second world war. After the second world war, many firm saw the need to plan for capital
expenditure, hence it is prevalence today. The Nigeria brewery Limited and other beverage are
not left out in the train of firm that prepare budget for its capital expenditure.

Capital expenditure is any significant expenditure incurred to acquire or improve land, building,
engineering structures, machinery and equipment. It normally confers a benefit lasting beyond
one year and results or the acquisition of extension of the life of a fixed asset. Capital budgeting
in

Making decisions have significant future benefits or cost or various entities and their
stakeholders.

Capital budgeting is a multi-year financial plan, usually five or ten years for the constructions or
acquisition of capital work. The plan, once complete, should provide for the planning of future
financial resources required to finance the project, identify the future financial resources to
allocate from the operating (revenue fund) budget to operate and maintain the capital asset once
it is acquired and integrated with Nigeria breweries on going management control system.

Capital budget is distinguished from an operating budget. An operating budget normally provides
for the day to day expenditures of Nigeria breweries, for items such as salaries, wages, benefits
maintenance of building and infrastructure etc. while capital budget plans for the acquisition or
rehabilitation of capital assets.

3.2 Capital rationing

3.3 CURRENT LITERATURE BASED ON THE VARIABALES

According to Mr. Aguolu (1998) capital budgeting decision is that financial decision, involving
an outlay of funds in the present time and in the future.

According to the International Federation of accountants (IFAC). Capital expenditure is the

investment to acquire fixed or long lived assets from which a stream of benefits is expected.
Such expenditure represents an organization’s commitment to produce and sell future projects
and engage in other activities.

According to Douglas Garbult (2002). The payback period is the length of time required for cash
return form the project to equal the total initial cash outlay. Charles T. Horngren and George
Foster (2007) defines the net present value (NPV) as the present value of all future return
discounted at an appropriate cost of capital minus the cost for the investment

Halm Levy and Sarnat Marshall (2003). Defines internal rate of return as the rate of discount,
which equate the present value of the expected cash flow with the initial investment outlay.

Longman dictionary defines budget as the plan that is qualified in a monetary term, while capital
budgeting is a long-term plan made for expenditure necessary to buy fixed asset for the
production of the goods and services.

Business dictionary: Defines capital budgeting as a plan for raising large and long-term sums
greater than the period considered under an operating budget.

Investopedia.com,: Defines capital budgeting as the process in which a business determines

whether projects such as building a new plant or investment in a long-term ventures are with
pursuing.

According to Duncan Williamson (2012) capital budgeting relates to the investment in assets or
an organization that is relatively large. This is, a new asset or project will amount in value to a
significant proportion of the total assets of the organization.

According to Dr. P. Shanmukha Rao (2010). The term capital budgeting refers to long-germ
planning for proposed capital outlay and their financing. It includes raising long-term funds and
their utilization.

It is the firm’s formal process of acquisition and investment of capital. it may also be defined as
the decision making process by which a from evaluate the purchase of major fixed assets”.

According to Rene Storm (2008)” A budget is a document containing a preliminary approved

plan of public revenues and expenditure”.
According to Brian Bass demand Media (2009). Capital budgeting determines the worthiness of
the project and helps a business determine if it will yield a return satisfactory to its managers and
investors.

3.4 Summery of literature review

In summary, this research work has been able to show the origin of capital budgeting its
theoretical framework and current literature based on the variables which shoes the impact of
capital budgeting in a private sector to achieve what is called capital rationing. Capital rationing
has to do with acquisition of new investment. More to the point capital rationing is all about the
acquisition of new investment based on such factors as the rent performance of other capital
investments, the amount of the asset. Capital rationing is strategy employed by companies to
make investment based on the current relevant circumstances of the company. Generally; capital
rationing is utilized as a means of putting a limited or cap on the portion of the existing budget
that may be used in acquiring a new asset. As part of this process, the investor will also want to
consider the use of a high cost of capital when thinking in terms of the outcome of the act of
acquiring a particular asset. Obviously, any responsible company will choose to employ
strategies that support the productive use of disposable funds build within a capital budget.
Sometimes, it is important to understand what benefits can reasonably be expected from owning
the asset in question.

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CHAPTER-4 Data Analysis, Interpretation and Presentation

4.1 Analysis of capital projects

4.2 Determining cash flow

4.3 Operational definitions of terms

CAPITAL BUDGETING: This is the long term plan made for production, necessary to buy fixed
asset for the production of the goods and services.

Finance: This is the term used to donate acquisition and spending of fund to met an economic
unit objective

Cash flow: This is the asset of long-term nature used in the production of goods.

Capital rationing: This is the allocation of scarce capital resources among competing
economically desirable projects, which cannot be carried out to capital or other constraint.

Ranking: This is the arranging of project in other of their viability with reference to the
evaluation result.

Capital expenditure: This is the investment to acquire fixed or long-lived assets from which a
stream of benefits is expected

Budget: This is the plan that is qualified in a monetary term

Private sector: This is the part of the economy sometimes referred to as the citizen sector which
is run by private individuals or groups.

4.4 Principals And Methods

4.5 Organizational structure

4.6 Ranking of Investment proposal

4.7 Demand for capital

4.8

4.9
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CHAPTER-5 Summary Of Findings, Conclusions and

Recommendations
5.1 summary of Findings

5.2 Conclusion

5.3 Recommendations

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Bibliography

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Appendix

RESEARCH QUESTION

The following questions have been formulated as a guide for this research.

Do Nigeria breweries management use capital evaluation techniques in evaluating their project?

To what extent does evaluated project yield adequate return for investors?

What are the factors that influenced the selection of project to be invested in?

To what extent is evaluation of capital project important in NBC budgeting?

Is the appropriate selection of human factory the fidelity of the capital budgeting?