EFFECTIVE CAPITAL BUDGETING AS A STRATEGY FOR ORGANIZATIONAL PRODUCTIVITY AND GROWTH

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EFFECTIVE CAPITAL BUDGETING AS A STRATEGY FOR ORGANIZATIONAL PRODUCTIVITY AND GROWTH

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Capital budgeting can be explained in the context of a firm’s decision to invest its current funds in long term activities in anticipation of an expected flow of future benefits over a number of years. However, the investment decisions could be in the form of acquisition of additional fixed assets, replacements and modifications of activities or expansion of a plant. Therefore, the financial manager should give due consideration to the following factors when capital budgeting decisions are involved:

Availability of investment capital and its alternative uses
The huge expenditures or large cash outlay
The gestation period between initial expenditures and returns and
The expectation of higher returns because of factors (a) and (b) above.

Based on the factors above, the manager must not fail to make appropriate investment or selection of good projects because, the volume of fixed assets to exceed current assets and the owners of the company (shareholders) are long term investors, whose high expected returns can only be met with the higher returns from long term assets. These assertions, call for the need to examine the different methods of selecting investments in long term assets which will be discussed in chapter 2.

Therefore, it is the responsibility of management to search for profitable investments by evaluating each investment proposal critically both in terms of its expected cash flows and benefits.

Project proposals must be thoroughly evaluated to determine their economic viability and profit potential and estimating the risk involved and the extent to which this will affect the organization.

Thus, investment decisions are increasingly determining the direction and pace of a company’s future growth and limit the opportunities open to it in much way that the rail tracks determines the speed and direction open to locomotion train. The research is on Coca-Cola Company (Kaduna), to know how they invested on long term projects such as land development, acquisition of fixed assets for production, through the use of capital budgeting techniques as a strategy for good project management.

1.2 STATEMENT OF THE PROBLEM

According to ICAN Pack professional examination II management accounting; capital budgeting is the investment of a firm’s current funds in long tern activities in anticipation of an expected flow of future benefits over a number of years. The future is full of uncertainties considering the fact that the business world is dynamic. Therefore project proposals has to be evaluated properly to ensure that the company’s resources are been properly allocated and utilized wisely to ensure maximum return (profit) that will keep the company growing. The investigative study is therefore an attempt to find out why the selection of which capital budgeting techniques to use in appraising investment proposals is source of problem to management and to proffer feasible solution to alleviate management problems.

However, in every organizational set up, one fact remains that management is always faced with problems of decision making. Besides, they are always concerned with what type of decision would be appropriate to maximize shareholders wealth. The size of the amount to be expended greatly determines the organizational level at which that expenditure decision can be made.

1.3 OBJECTIVE OF THE STUDY

The objective of this research work is to critically examine the policies, practices and techniques of capital budgeting and how these are applied in project evaluation in coca-cola Company. The research work will identify the various problems associated with each techniques of capital budgeting and make recommendation possible to change the company’s approach to capital expenditure management and evaluation. This will enhance the company’s profitability level and increase in shareholders wealth.

1.4 STATEMENT OF HYPOTHESIS

A hypothesis is a tentative statement that has not been emphatically tested. It is an opinion, an idea or suggestion put forward as a starting point for reasoning, explanation or study to determine the correctness of assumed parameters usually by various sampling techniques. In the light of this assertion and in order to obtain a meaningful study, the researcher will use the null and the alternative hypothesis.

Based on the established objectives of the study above, it is therefore hypothesized that:

H₀: The techniques of capital budgeting has no significant effect on good project management

H₁: The techniques of capital budgeting has effect on good project management

1.5 SIGNIFICANCE OF THE STUDY

The importance of effective capital budgeting in the management of business as regard long term investment cannot be over emphasized. This is because the growth and development of a firm, even in its liability to remain competitive and to survive depends upon constant flow of new investment. The national for research work is intended to fashion out modalities and bring into line light the various capital budgeting techniques that can be used in evaluating profit by companies so as to assist management of Nigeria bottling company ltd Kaduna in their allocation of resources to viable project. The research work will also serve as a reference point to student and other researchers who may wish to undertake a similar topic project. In addition, it will help managers faced with capital expenditure on how best company’s fund can be invested on capital project whose benefits are to be realized over a relatively long period.

1.6 SCOPE OF THE STUDY

The study of capital budgeting techniques is so broad especially in a big organization of a public owned company in Nigeria with varying investment portfolios in different sector of the economy. However, this study is confined to “the coca-cola company”.

1.7 LIMITATION OF STUDY

When carrying out this research work on effective capital budgeting techniques as a strategy for good project management; a case study of the coca-cola company, the researcher was faced with some major constraints like time and inadequate cooperation.

1.8 HISTORICAL BACKGROUND OF COCA-COLA COMPANY

The coca-cola company was founded in 1892 with its headquarters in Atlanta, Georgia USA and it is served worldwide. It is a public company that produces beverage that produces coca-cola carbonated soft drinks water and other non-alcoholic beverages.

Revenue is US$ 31.0 Billion (FY2009)

Operating income is $8.23 Billion (FY 2009)

Net income is US$ 5.82 Billion (FY 2009)

Total assets is US$24.8 Billion (FY 2009)

Employees 92,800 (July 2010 and the key people are Muhtar Kent (Chairman and CEO). The company is best known for its flagship product coca-cola, inverted by pharmacist John Stith Penberton in 1886. The coca-cola formula and brand was bought in 1889. The coca-cola company in 1892 besides its namesake coca-cola currently offers more than 400 brands in over 200 countries or territories and serves 1.6 billion serving each day.

The company operates a franchised distribution system dating from 1889 where the coca-cola company only produces syrup concentrate which is the sold to various bottlers throughout the world who hold an exclusive territory. The coca-cola company owns its anchor bottler in North America, coca-cola refreshments.

The coca-cola company is headquartered in Atlanta, Georgia. Its stock is listed on the NYSE and is part of DJIA, S&P 500 index, the Russell 1000 index and the Russell 1000 growth stock index. Its current chairman and CEO is Muhtar Kent.

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