1.1 BACKGROUND OF THE STUDY
Probably amongst the most crucial decision facing management today are those concerned with capital investment. Typical of these decisions are those related to expansion through adding of new product lines, factory extension for extension in new sales entries. The significance of a decision of this nature is obvious since based on the decision made, the firm will find itself, committed to a pattern of activity and expenditure that will continue for some time into the future due to huge capital outlay involved.
Uncertainty with respect to the future is considered in any investments decision but the further into the future its efforts are projected, the greater the degree of that uncertainty.
Management appraisal involves the generations of investment proposals, the estimate of cash flow for the proposal, the evaluation of cash flow, the selection of project based upon an acceptance criteria and the continuance re-evaluation of investment project after their acceptance (Home et al 1983).
How high a proposal must go before it is finally approve depends upon how large the capital outlay is the greater the capital outlay, the greater the number of evaluations that may be the required. The object of any system of project evaluation is to be able to compare the profitability of a series of funds usage. Each project will require the use of volume of the firms fund for varying periods and will also provide for the returns of those funds together with an element of profit. The appraisal system should be able to take both of these factors and by comparing them, calculate a comparable rate of return.
This will enable investment projects to be measured against two criteria.1.Â Â Â Â Â To ensure that only those projects that give the highest rate of return are selected.2.Â Â Â Â Â To ensure that investments are not made in projects that will give a rate of return less than the cost of capital employed in the business.