INVESTMENT APPRAISAL AS A GUIDE TO EFFECTIVE MANAGERIAL DECISION

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.

1.2     STATEMENT OF PROBLEM

One of the things that help an organization or a firm to grow rapidly, the ability to make right decision as regards to investment. This work will help the researcher to find the possible solution to some problems that is facing management in terms of decision making in regards to investment.

1       Does investment appraisal lead management to invest on the appropriate project?

2       Does investment appraisal help management to invest on viable projects?

3       Does correct investment decision improve productively?

1.3     PURPOSE / OBJECTIVE OF THE STUDY

OBJECTIVE OF THE STUDY IS TO:

a        Study the needs of investment appraisal to organization

b        Study the impact of investment appraisal towards managerial decision.

c        To investigate the problems on centered in the use of discounting and discounting appraisal techniques in selecting some conflicting investment.

1.3     PURPOSE / OBJECTIVE OF THE STUDY

The main objective of this research work is to identity and examine investment appraisal in managerial decision making. Having said this, the purpose / objectives of this study includes:

i         To investigate the problems on centered in the use of discounting and appraisal techniques in selecting some conflicting investment.

ii        Study the impact of investment appraisal towards managerial decision.

iii       To study the needs of investment appraisal to organizations

1.4     SIGNIFICANT OF THE STUDY

This research work of investment appraisal is very important the solution and the recommendation that emanate form this study will assist the financial analyst and the managers in their decision making towards capital investment.

It help and expose managers to understand the need to appraisal and any given investment to know its viability.

It also aids the managers in knowing the factors and appraisal techniques to consider during mutually independent or conflicting investment.  

1.5            RESEARCH QUESTIONS

a        Does investment appraisal play an important role in manufacturing firms?

b        Does management makes right decision towards investment?

c        Does investment trades on the right projects?

d        Does the appraisal techniques use in evaluating investment appraisal adequate?

e        Does investing on the right project improve the firms profitability of investment opportunity?

1.6     RESEARCH HYPOTHESIS

Tests are to be concluded to ascertain the result of the following hypothesis.

1        Ho: Investment appraisal does not aid effective managerial decision making.

Hi:     Investment appraisal aid effective managerial decision making.

2        Ho: There is no significant relationship between investments appraisal and the firm’s productivity

Hi: There is significant relationship between investments appraisal and the firms productivity

1.6     SCOPE OF THE STUDY

This research work was conducted with selected industries in Nnewi such as Chikason Group, Luis Carter Indusries Nnewi. Being that these companies represent other manufacturing industrie. Although the researcher would have like ot carry out moer esearch on their companies in Nnewi. But due to shortage of time and other constraint, the above companies where the one which this research has been conduct in place of others.

1.8     DEFINICTION OF TERMS

ACCOUNTING RATE OF RETURN (ARR)

It is non-discount cash flow capital budgeting technique expressed as the expected average annual operating income divided by the initial investment.

BALANCED SCORE CARD:

It is a performance measure system that strikes a balance between financial and ooperating measures link performance to rewards, and gives explicit recognition to the diversify of stake holder interest.

ACCOUNTING SYSTEM

It is a formal mechanism for gathering, organizing and communicating information about an organizations activities.

PAYBACK PERIOD

This is a technique measures projects on the basic of the period over which the investment pays back itself or he period of recovery of the initial investment or it is defined as the period usually expressed in years, in which the cash outflows will equate the cash inflow form a project (CIMA)

CONCEPT OF ANNUITY

An annuity is a constant sum of money receivable or payable over a specific period of time.

NET PRESENT VALUE (NPV)

Is a summation of all discounted cash flow (DCF) associated with a project, this is the difference between he present value of cash out lay or outflow and the positive present value of the cash inflows.

INTERNAL RATE OF RETURN

Is that cost of capital or return that will produce an NPV of zero if applied to a project. It is a break even point cost of capital.

CAPIRALT RATIONING:

Is a situation in which a company does not have sufficient fund to execute worth while investment projects.

PROFITABILITY INDEX (PI)

It is the contribution per limiting factor approach that is, it is actually a benefit / cost analysis of projects.

INFLATION

Refers to increase in estimates as a result of changes in price levels.

RISK

Is a situation in which the occurrence of future uncertain events is known but the possibilities of such future events can quantified.

UNCERTAINTY

Is a situation in which the probability or possibility of occurrence of such future event can not be quantified.

DECISION MAKING

Is the purposeful choice from among a set of alternative courses of action designed to achieve some objective.

INVESTEMENT CENTER

Is a responsibility center where success is measured not only by its income but also by relating that income to its invested capital as in ration of income to the value of the capital employed.