INVESTEMENT APPRAISAL A GUIDE TO EFFECTIVE MANAGERIAL DECISION A CASE STUDY OF SELECTRED MANUFACTURING COMPANY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1            BACKGROUND OF THE STUDY

As business in this modern generation are growing rapidly and becoming more competitive among other investment (long run investment). Decision involves the acquisition of machinery, vehicles, buildings, patent right, new product line, copy right research and development and so on are critical decision facing managers of today’s business. however, these exists a greater task to the management when it comes to conflicting decision as regards to the selection of projects to embark on.

Under these circumstance, the management is left with series of potential projects with pregnant risk and returns. Given that the resources are limited in supply, the investor are bound to consider many factors before selecting a particular investment.

Investment is the key word to every established firm, organization both private and public make decision on projector investment at hand overtime, as managers that make decisions about a variety of specific investment, one could say that the organizations performance in any particularly year is the combined result of all the investment under way during the year.

Therefore, investment is any scheme of investing resources, which can reasonably be analyzed and appraised as an independent unit. This in-depth analysis and combination between the movements of cash outflow and cash inflow decision is known as investment appraisal.

The aspect of investment that leads to capital expenditure decision should be evaluated or appraised properly. Therefore, this research is prepared to study the investment appraisal as a guide effective managerial decisions. Appraisal of investment is one of the key drives of business financial system. Sound investment that implemented well founded strategies are essential to creating shareholders wealth and must appraised both in a proper content and with sound appraisal techniques. Under this aspect, an economic trade-off must be made between the resources of cash benefits to be obtained. Analyzing this trade is essentially an appraisal process that makes an economic assessment of combination of positive and negative cash pattern. This task is difficult because it deals with future conditions subject to uncertainties and risks.

Nevertheless, investment appraisal is of paramount importance of all investment both large and small some investments are beneficial during their early stage with high returns, however these cash inflow are not adequately maintained from such project or investment during the maturity periods. With these developments, the investors, workers, and management are not motivated with such result.

Therefore, without a planned scrutiny of the investment, management decision will be jeopardize and management standard and policy will be instable.

Having established these facts, far an effective investment appraisal the following factors and steps must be religiously considered.

a        Project identification

b        Project evaluation

c        Project selection

The selection of an alternative should be determined by the use of these appraisal techniques

NON DISCOUNTING CASH FLOW TECHNIQUES

i         Payback period

ii        Accounting rate of return.

B       DISCOUNTING CASH FLOW TECHNIQUES

i         Net present valve (NPV)

ii        Internal rate of return (IRR)

iii       Profitability index (PI)

          The application of cost analysis should be employed to determine the cost of capital and hurdle rate where discounting approach is the organization policy. The expected coupled with the uncertainties or riskness associated with the investment for an in-depth comparative analysis, with the investment for an in-depth comparative analysis with these rules and principles, managerial decision stand at the best alternative to maximize the organizational profit.