This chapter introduces the topic “effectiveness’ of capital investment appraisal techniques which is also called “capital budgeting techniques” in financial institutions. The study seeks to executive how First Bank of Nigeria Plc applies its investment (s) appraisal techniques.
The first chapter deals with the background of the study statement of problems and the objectives of the study. This chapter also examines critically, the justification and relevance of the study, scope and limitation of the study and finally, plan of the study.
Investment could be described as the setting aside of the certain proportion of income or profit to generate additional or future returns. It could also tensed as the induction of available financial and natural resources into the economy top enhance further growth and development.
Investment constitution a source of fund to the receiver of such funds while it is an application of fund the provider Both the providers and the receiver of such may be individual organizations, government and other national and international investors.
Investment can be done in two ways vis: equity and loan stock, investment is the commitment of present day funds and resources into projects, activists and aspect which are expected to yield income in the future capital investment can also be said to be ersoucres which are capital in nature and as such can not be easily converted to liquid cash within a short period of time. While stock investment is the purchase of shares or bond in limited companies which are in corporated under the law and duly registered on the floor of the stock exchange.
This shares or bonds are expected to yield dividends or interest either a fixed rates of varying rates depending on the nature of the shares or bonds for example ordinary shares yield vending fixed rate of interest wether the company declares profit or not, on the other hand, debentures yield fixed rate of interest whether the company declares profit or not.
Investment is divided into two namely, long term investment and short terns investment.
Long term investments are mostly used to fiancé capital projects and short term investment are mostly used to fiancée working capital shortage.
There are certain factors which influence capital investment decision; such factors as propensity to save rte of interest on saving net cash that is currency in circulation in the business environment rates of obsolesce in the productive fixed assets. The opportunity cost the financial risks and other uncertainties in the business environment and the profitability of the investment. These variables make article evaluation of investment alternatives necessary in order to maximize the wealth of the potentials investor.
The decisions on when and how to utilize the available financial resources is taken by proper investment appraisal. This can also be referred to capital budgeting which is the production of the cost an return on invested as well as investment of capital funds. It should be noted however that an elaborate investment as appraisal would be needed when dealing with many numbers of individual routine investments because the cost might not satisfy the means. For large companies, an elaborate appraisal is need, skillful and complex fact findings one involved these are often carried out by employing the service of experts.
It is imperative to emphasis the fact that an elaborate system of appraisal does not guarantee the source of an investment. Not withstanding, the decision. This is because the projections are made into the future in which a lot assumption is made. The decision based upon these evaluation techniques will give its management into maximizing the wealth of the share holders whose interest they represent, it is for this purpose that we are embarking on this study.
Two broad problems arise with investment appraisal the first is the result of not applying capital investment appraisal techniques before making investment decisions the second problem is the inability of the management to apply the right method of appraisal.
These problems are better expressed as follows:
The propose of studying is to identify the need for investment appraisal and the procedures was to be applied by an organization for growth and development. This study shall also demonstrated the various capital investment appraisal techniques as adopted in First Bank Nigeria Plc and also review other capital investment appraisal techniques, their merit and demerits their assumption and critical for each at the techniques . The effect of the environment factors on the choice of investment appraisal techniques a comparison between these factors shall analyzed in this study.
The method which will be adopted in carrying out this study includes questionnaire and personal interview in some cases.
The source of data available for obtaining information for the purpose of this research are primary and secondary source which provide for all the necessary information needed as far as the research working concerned.
The information used in the research were from the main source. The first source is the use of questionnaire administered personally on the respondent.
The second source is an extensive interview of strategic management of First Bank of Nigeria Plc.
1.5 JUSTIFICATION AND RELEVANCE OF THE STUDY
This study shall be great important to individual and corporate bodies who are involved in capital investment decisions making. This study will be used in the evaluation of capital project.
These are projects with not only it will be useful in this area, but is will also assist management to make proper decisions in the case of mutually exclusive project. These are projects with different life span and capital rationing.