CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Investment is the process of obtaining title deed to an asset such as financial asset or real asset for the purpose of receiving returns form the assets. Investment appraisal determines whether or not new investment or projects should be undertaken. Project Evaluation is the process by which management plans analyses and control organizations investment. On the other hand, investment decision is technique that can be applied to any type of investment made by (individuals or companies) where the financial implication can be identified. Decision making cannot be said to be alien to managements, Infact, it is as primitive as the existence of human organisms, since a choice has to be made among alternatives (opportunity cost concept) due to scarcity of resources There are basically three major level of decision namely strategy decision, tactical decision, Operational decision, each of these decisions are taken at different hierarchy of the organization. Having recognized the need of defined organization structure especially with the advancement of technology and industrial revolution occasional by rapid economic growth, different organization have deemed it fit to specify their aims and objectives in order to achieve the organizational goals. Such organization objective there exits investment decision making which is aimed at selecting the investment project that will maximize the shareholders’ wealth. Project appraisal will be incomplete without looking at the basis stages project has to go through, in relation of the project cycle in order to search through the project identification and definition, project preparation, Project analysis, project implementation and the evaluation techniques. The traditional view of investment appraisal is on the old method which does not consider the time value of money and it is fraught with some difficulties which are peculiar to it. Such method includes: Pay Back Period (PBP) Method. Average profit or Accounting Rate of Returns (ARR) Method. The sophisticated method is also called the scientific or discounting methods incorporated the time value of money into its analysis, thereby making them to be more acceptable since they also take account of variables, having critical impacts on investment decisions. Net Present Value (NPV) Method. Profitability Index (PI) or benefit cost ratio Method. Internal rate of return (IRR) Method. However, investment appraisal under condition of risk and uncertainty shall also be looked into with reference to the following techniques. • Time based Method Probability based technique Sensitivity analysis and Simulation techniques. In an attempt to round off this research, the important of project implementation evaluation will be summarized in order to identify the various quantitative and qualitative factors which might affect the company’s decision making so as to carry out the control function and suggest corrective measures in order to forestall negative interference in the company’s investment project decision making process in the future.
1.2 STATEMENT OF THE PROBLEM
The problems faced in preparing and analyzing of the project is stated below such as:
1. Limited Materials which can be said as the problem in getting accurate information for the project analysis.
2. Another problem faced is time in carrying out the proposed project.
3. Research instrument is another problem faced in analysis the project.
4. Inadequate data on the other hand are the problems faced in presenting the proposed project.
5. Limited information from respondents which cause problem in analyzing the proposed project
1.3 PURPOSE OF THE STUDY
Every management of various organizations should evaluate any project before fund is committed to it.
1. Therefore the purpose of the study is to enable the manager of a company to identify various projects that can be appraised or evaluated.
2. It highlight the conditions under which project can be evaluated.
3. The study is to enable company manager to enumerate different types of decisions in investment appraisal.
4. The study is to help the manager to highlight the investment techniques under different conditions.
5. The study critically examines the various project evaluation. Techniques that will aid management in their investment.
6. The study states the similarities between short run and long run decision making of the investment.
7. It enables the financial manager to forecast the possible event of the project with certainty.
8. It emphasize on the methods of investment appraisal that incorporate the time value of money and those that do not incorporate the time value of money.
9. The study will ensure manager the project that will generate adequate returns from investment chosen aid fund committed. 10. The study will enable the manager to know the strategies to be adopted in the investment process.
1.4 RESEARCH QUESTIONS
i. What is investment appraisal?
ii. How does the condition under project is appraised affecting the investment decision making?
iii. What are the types of decisions that can be made when investing?
iv. How might one be able to assess the potential economic value of those strategies?
v. What are the similarities between short run and long run decision making?
vi. What are the techniques to take in decisions making of investment?
vii. What are the factors to be considered when capital budgeting decision is involved in investment?
1.5 STATEMENT OF THE HYPOTHESIS
The findings are based on hypotheses upon the observation techniques will be used.
Ho: Investment appraisal is not significant in decision making of any project evaluation of an organization. Hi: Investment appraisal is significant in decision making of any project evaluation of an organization.
Ho: Project appraisal techniques are not relevant in investment decision making.
Hi: Project appraisal techniques are relevant in investment decision making.
Ho: Project appraisal technique does not determine the cash flow accrue to the organization.
Hi: Project appraisal technique does determine the cash flow accrue to the organization.
1.6 LIMITATION OF THE STUDY
Investment project appraisal relates to both public and private sectors of the economy and they cover a wide range of the economic facets. The areas to be covered in this work shall be limited to investment appraisal under conditions of risk, uncertainty, inflation, taxation and capital rationing as well as where the underlined objectives of the firm is wealth optimization. The general over view merits and demerits as well as the relative usefulness of each investment appraisal techniques will be weighted. There are some unforeseen circumstances that will make the study not be carried out extensively, some of which are, limited materials like finance, time, text books materials, as well as epileptic power supply. Finally the study shall be restricted to Mobil Oil Nigeria Plc.
1.7 SIGNIFICANCE OF THE STUDY
It is important for management of various organizations to evaluate projects to be embarked on. Also the study should emphasis on techniques to be used in investment evaluation. The study will enhance the minimization of risk associated with project. The study will help to know the decision making in the short term or long term investment. The study will highlight the various different conditions to use in investment decision making. The study stimulates the forecasting model for project and variations in estimate of cost benefits and timing of events.
1.8 DEFINITION OF TERM
In order to facilitate easy and better understanding of this project work, the definitions of certain terms that feature prominently are given below: Appraisal Techniques These are technique that companies the traditional techniques and the discounted cash flow techniques. Traditional Techniques These methods ignore the time value of money and to that extent, they are considered to be theoretically weak and they will not necessarily lead to the maximization of the market value of ordinary shares.
Payback Period Payback period is the time taken in years for a project to recover its initial investment. Payback period can be computed dividing the cash outlay by the annual cash inflow that is Initial outlay Payback = Annual cash flow Accounting Rate of Return (ARR) The accounting rate of return measure is based upon accounting profit, not cash flow; it uses financial accounting profit after charging all financial accounting expenses including depreciation. Average Annual Accounting Profit ARR is represented by Average Investment Discounted Cash Flow Method Discounted cash flow methods adjust for the timing of receipt and payment and, therefore overcome one of the most serious problems of the accounting rate of return and payback methods. Net Present Value NPV Is the value obtained by discounted all cash outflows and inflow of a project by a chosen target rate of return or cost of capital. Internal Rate a/Return (IRR) The Internal rate of return techniques is a percentage discount rate used in Capital Investment appraisal which brings the cost of project and its future cash inflow into equality. Profitability Index. Profitability Index is the ratio of present value of project life to the Initial Capital Outlay. It is represented by PI = PV Outlay Net Terminal Value Net terminal value is a compounded value of net present value of the life of an asset Risk A risk is a situation where possible outcome or return cannot be estimated with probability of occurrence.
