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EVALUATION OF CAPITAL BUDGETING IN PUBLIC SECTOR ORGANIZATIONS IN NIGERIA

ABSTRACT

Capital budgeting decision usually involves substantial’s expenditures on new assets. These decisions are particularly important because the firm losses much of its flexibility by looking into projects and because budgeting decisions define the firm strategic direction. Capital budgeting in Ikorodu local government is very vital and must be approached with all sense of diligence. This project is intended to create awareness in capital budgeting in Nigeria local government. The need for this study arises from the variation in capital budgeting in Ikorodu local government that has been noticed and this research work hoped to improve the standard. In order to achieve this, project has gone into so many past works of authors and related literatures. The data for the study were made up of primary data. Interviews and questionnaires were used for proper and precise responses. The questions were of the closed type. This was done to empower the respondents and chi-square was used to analysis the result. Capital budgeting decisions are made in terms of both quantitative factors (monetary measure of costs and benefits) and qualitative factors (non-monetary measure of costs and benefits). Capital budgeting decisions are particularly difficult in non-profit organizations such as national and local government organizations, since it is not always possible to precisely quantify the costs and benefits of a project. The major findings that emerge from the study can be summarized as follows: i.There is relationship between effectiveness of Ikorodu Local government and optimal allocation of resources ii.There is relationship between efficiency of Ikorodu Local government and optimal allocation resources. iii.Effectiveness and efficiency of capital budgeting improve the revenue generation of Ikorodu Local government From the above mentioned summary of major findings, it is observed that capital budgeting is very relevant to public sector organizations. It was recommended that capital budgeting aids planning of annual operations, co-ordinating the activities of the various parts of the organization, communication of plans to various responsibility centre manager, motivating managers to achieve organizational goals. Control of activities and evaluation of the performance or governmental institutions or government and its enable the management of nonprofit organization to make more informed decisions about the allocation of resources to meet the overall objectives of the organization.

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

Budgeting occupies or plays a strategic or pivotal role in every organization, be it public owned organizations or privately owned organization. To this extent, the evaluation or role of capital budgeting cannot be undermined because of its evaluation in financial decision. Budgeting has been defined in different ways but it means of the same or relatively the same by different authors, scholars and schools of thought. According to the Institute of Cost and Management Accounting, Budgeting as a financial and quantitative statement prepared on capital expenditure prior to a definite period of time of the policy to be pursued for the purpose of attaining a given objective. In the word of G.C Philipalys ‘Capital Budgeting’ is concerned with allocation of firm’s care financial resources among the available market opportunities. In his own view, Omolehinwa (2005) explained that Budgeting consists in planning, development of available capital for the purchase of maximizing the long term profitability in the concern.

In general view, Budgeting involves all the processes in the investment of resources in the long term projects in anticipation of making profit or providing essential services to the public acquisition of land, building, machinery and other capital projects. More often than none, the resources of a nation or society are not allocated to its component by the market forces or mechanisms (prices) but by the public decision making means. The principles that guide the allocation of the public resources ensure the resources are distributed in such a way that the objectives of the public are accomplished through efficient and effective budgeting system.

Also capital budgeting is the planning process used to determine whether a firm’s long term investment such as new machinery, replacement machinery, new plants, new products and research development projects are what pursuing capital budgeting is the process of analyzing potential investment for the firm. Capital budgeting decisions are probably the most important ones financial managers must make. Capital budgeting decisions usually involves substantial expenditures on new assets. These decisions are particularly important because the firm loses much of its flexibility by locking into project and because budgeting decisions define the firm’s strategic direction. Kinds of capital budgeting proposals is as follows:

1. Replacement/Modification of fixed assets- e.g. Worn out, obsolete are replaced at appropriate time

2. Expansion — involves an addition of capacity to existing production facilities.

3. Modernization of investment expenditure — they make it easier for a firm to reduce cost and may coincide with replacement decision.

4. Strategic investment proposal — these are budgeting decisions which do not assume that the return will be immediate or measured over a long period of time. Strategic investments are defensive, offensive and mixed motive decision. The vertical integration of a firm is an example of defensive investment in which a continuous source of raw materials is assumed. Horizontal combinations are offensive investments for they ensure a firm’s internal and external growth respectively. Mixed motive investments are outlays on research and development programmes.

5. Diversification of business — means operating in several market or firm one market into another market it may even amount to changing product lines.

6. Research and development — where the techno1or is rapidly changing, research and development area is a continuous activity in any firm usually large sums of money are invested in research and development activities which lead to capital budgeting decisions.

1.2   STATEMENT OF RESEARCH PROBLEM

This research work will focus primarily on investigating and point-out the problems facing public owned organizations for its inability to put in place efficient allocation of resources, equitable distribution of income by the use of tax and stabilization of economy by the use of capital budgeting and how it affects their service delivery to the people, high lost an inadequate capital, poor human resources, unpredictable social and economic factors bad policy formulation, sharp practices.

1.3   RESEARCH QUESTIONS

(1) Does Capital Budgeting efficiently related to public revenue at the Ikorodu Local Government?

(2) Does Capital Budgeting correspond to capital project from internal revenue drive in Ikorodu Local Government?

1.4   OBJECTIVE OF THE STUDY

This study aims of assessing the capital budgeting in financial organization. Therefore the objective of this work will be carried out as followed.

(i) To evaluate the application of capital budgeting in an organization.

(ii) To examine capital budgeting and its effect on financial performance of organization.

(iii) To ascertain the usefulness of capital budgeting in carry out the activities of organization.

(iv) To point highlight the difficulties in the application of capital budgeting system and suggest recommendation that will bring improvement.

(v) To examine how effective capital budgeting on financial performance organization.

1.5   SIGNIFICANCE OF THE STUDY

This research study will endeavor to show how Public Sector can go about putting its Capital Budgeting in place to bring desired results to the people. Also, to contribute to the body of knowledge this will be beneficial to the society at large. As a policy instrument a capital budget might induce policy- makers to think more about-ten” capital spending in light of the debates as to the optimum level of the public capital stock. This is not say that a capital budgeting might not lead to misuse, that large capital items might not be considered in annual expenditure plans and hidden from public scrutiny, except by knowledgeable analyst. In this respect, some of the political problems are pertinent — that is, the starting point for a capital. Capital Budgeting in Nigeria local Government is very vital and must be approach with all sense of diligence.

The rate of economic development in the Nigeria local government has been relatively slow due to continuing whiting down of their powers by the state government and the state government has continued to encroach upon what would normally have been exclusive preserves of local government at their most basic levels. Fortunately, the picture is now different since the functions of local governments, sources of revenue and other responsibilities have constitutional backing. Therefore, the rate of economic development in the government to be accelerated.

1.6   RESEARCH HYPOTHESES

(1)    H0: Capital Budgeting system does not improve allocation of resources efficiently in Ikorodu Local Government.

H1: Capital Budgeting improves allocation of resources efficiently in Ikorodu Local Government.

(2)    H0: There is no corresponding capital project from Internal Revenue drive in Ikorodu Local Government

H1: There is corresponding capital project from Internal Revenue drive in Ikorodu Local Government

1.7   SCOPE AND LIMITATION OF THE STUDY

This research study will try to point out what is obtainable in the Public Sector in terms of Capital Budgeting practices. This research work will limit its scope to capital budgeting in Ikorodu Local Government.

1.8   DEFINITION OF TERMS

Capital Budgeting: It is the processes in the investment of resources in the long term projects in anticipation of making profit or providing essential services to the public acquisition of land, building, machinery and other capital projects.

Budget: is a plan for how much money you have and how much money you spend. Sticking to a realistic budget allows you to pay off your debts and save for the proverbial rainy day

Accounting Rate of Return: The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project.

Net Present Value (NPV): It is the aggregation of the present value of all cash benefits by deducting the present value of all cash. 

Profitability Index (PI): It is also known as the ‘Benefit Cost Ratio’ is the ratio of the present value of future cash benefit, at the required rate of return to the initial cash outlay of the investment.

Limiting Factor: A limiting factor is anything that limits the activity of an entity; examples of limiting factors are shortages of supply of a resource and restriction on sales at a particular price. That is, the limiting factor is the one factor that dominates all other factors that limiting factor can be any factor that is important to the carrying of the organizations activity.

Public Sector: The public sector is one of the largest sectors of any economy, for example, it accounts for about 20 percent of the entire economy. It consists of national and local governments, their agencies, and their chartered bodies.

Monetary policy: is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

Public Revenue: it is the study of public finance is the deep study of all finance operations related to the state which is therefore concerned with complete income and expenditure of public authorities and administrative structures that are adjusted with one another.

Capital expenditure: are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.

Financial decision: This is a judgment made regarding the method of raising funds that will be used to make acquisitions; it
is based on an entity’s ability to issue and service debt and
equity securities.

Profitability: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.

Market forces or mechanism: Forces of demand and supply representing the aggregate influence of self-interested buyers and sellers on price and quantity of the goods and services offered in a market. In general, excess demand causes prices and quantity of supply to rise, and excess supply causes them to fall.

Sharp practices: Sharp practice may include making misleading statements or threats, ignoring agreements, improperly using process, or employing other tricky and/or dishonorable means barely within the law.

Capital investment: The capital that a company has invested or can invest in itself. It is calculated by adding the company's long-term debt, stock, and retained earnings. It may also apply to an individual by adding his/her net worth and long-term debt.

Economic development: The term development is being used in various contexts and is being qualified as economic development, human development, international development, democratic development, and social development. In the present context, the first two terms merit special attention.

Operating budgets: the Operating Budget represents an estimate of future expenses, this is an accrual-based accounting figure, and it is the Disbursements for Operating Expenses Budget, a component of the Operating Expenses Budget, that drives a company's cash flows.

Topography:  is a field of planetary science comprising the study of surface shape and features of the Earth and other observable astronomical objects including planets, moons, and asteroids.

Economic analysis: A systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in achieving a specific objective under the given assumptions and constraints.

Capital rationing: a condition that exists when there is an
upper-dollar constraint on the amount of capital available
to commit to capital asset acquisition.

Drainage: Soil that is heavy or clayish tends to drain poorly, while soil that is mostly sand will drain rapidly. Neither extreme is good for most plants, which is one of the reasons humus content is vital to plants.

REFERENCES

Adams R.A (2002): Public Sector Accounting and Finance- Corporate Publishers Ventures, Lagos.

Balogun Yinka (1991): Inventory of Infrastructure Facilities in Lagos State.

Biodun Jimoh (2003): Principles of Finance, Printed in Nigeria by: Walex printer, 100 Bangbose Lagos.

Doughlas Auld (1993): Introducing Capital Budgeting into the Public Sector.

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