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THE IMPACT OF CAPITAL BUDGETING ON
ORGANIZATIONAL PERFORMANCE
ABSTRACT
This study
was intended to evaluate the impact of capital budgeting on organizational
performance. This study was guided by the following objectives; To determine
the nature of capital budgeting; to determine the nature of organizational
performance; to determine the impact of capital budgeting on organizational
performance; to determine the impact of capital budgeting on the performance of
ondo state ministry of works. The study employed the descriptive and
explanatory design; questionnaires in addition to library research were applied
in order to collect data. Primary and secondary data sources were used and data
was analyzed using the chi square statistical tool at 5% level of significance
which was presented in frequency tables and percentage. The respondents under
the study were 50 employees of the Ondo state ministry of works. The study
findings revealed that capital budgeting significantly impacts on
organizational performance; based on the findings from the study, efforts
should be made by the Nigerian government and stakeholders in promoting and
ensuring capital budgeting and implementation.
CHAPTER ONE
BACKGROUND
OF THE STUDY
An efficient
economic system calls for a dependable mechanism to allocate its resources.
Christy (1966) describesthat land, labour and capital are to be directed to
their best uses, and should hence be placed in the hands of those who can use
them most capably. In a market economy, this allocation process consists
largely of a set of private decisions, which are directed by a network of free
markets and flexible prices . Important among these decisions are capital
investments decisions that according to Northcott (1995) are vital at two
levels: for the futureoperability of the individual firm making the investment,
and for the economy of the nation as a whole. At the firm level, capital
investment decisions have implications for many aspects of operations, and
often exert a crucial impact on survival,profitability and growth. At the
national level, the proper planning and allocation of capital investment are
essential to an efficient utilisation of other resources,poorly placed
investment reduces the productivity of labour and materials and sets a lower
ceiling on the economy’s potential output. With this in mind it is no wonder
that capital investment or capital budgeting is a central application of
financial theory .the advantages and applications of sophisticated capital
budgeting procedures based on cash flows, risk and the time value of money are
seen as tools for maximising shareholders’ wealth, which is the same as
maximising the value of the firm (Copeland & Weston, 1992). This fact is
often approximated to the relationship that firms using more sophisticated
capital budgeting procedures should be able to perform better over time
(Christy, 1966; Klammer, 1973). Empirical studies
concerning
the adoption of sophisticated capital budgeting procedures
have shown
that even though the degree of adoption has increased over time, there is an
obvious “theory-practice gap” (Klammer, 1972; Schall, Sundem&Geijsbeek,
1978; and Graham & Harvey, 2001).
The research
therefore seek to evaluate the impact of capital budgeting on organizational
performance
STATEMENT OF
THE PROBLEM
Investment
on capital projectconstitute a major financial budget ofa firm.
Therefore it
is pivotal thatit impacts positively on the firms performance in terms of
profitability, market share,growth and shareholders value.
However many
organization make huge capital investment without exacting Positive result on
the firmsoperations.This is as a result of lack of proper Appraisal to
determine the relative worth of such investment.Capital budgeting is the
process in which a business determines whether projects such asbuilding a new
plant or investing in a long-term venture are worth pursuing. Oftentimes, a
prospective project's lifetime cash inflows and outflows are assessed in order
to determine whether the returns generated meet a sufficient target .Also known
as "investment appraisal.Ideally, businesses should pursue all projects
and opportunities that enhance shareholder value. However, because the amount
of capital available at any given time for new projects is limited, management
needs to use capital budgeting techniques to determine which projects will
yield the most return over an applicable period of time.Popular methods of
capital budgeting include net present value (NPV),internal rate of return
(IRR),discounted cash flow (DCF) and payback period
Therefore
the problem confronting the research is to determine the impact of capital
budgeting on organizational performance.
RESEARCH
QUESTION
What is the nature of capital budgeting
What constitute the nature of organizational
performance
What is the impact of capital budgeting on organizational
performance
What is the
impact of capital budgeting in ondo state ministry of works
OBJECTIVE OF
THE RESEARCH
To determine
the nature of capital budgeting
To determine
the nature of organizational performance
To determine
the impact of capital budgeting on organizational performance
To determine
the impact of capital budgeting on the performance of ondo state ministry of
works
SIGNIFICANCE
OF THE RESEARCH
The
researchshall providean analysis of capital budgeting and the techniques
applicable in capital budgeting tecniques.
It shall
serve as a source of information to managers and other professionals.
STATEMENT OF
HYPOTHESIS
Ho Capital budgeting is not significant in ondo state ministry of
works
Hi Capital budgeting is
significant in ondo state ministry of works
Ho organizational performance in ondo state
ministry of works is low
Hi organizational performance in ondo state
ministry of works is high
Ho The impact of capital budgeting on
performance in ondo state ministryOf works is low
Hi The impact of capital budgeting on
performance in ondo state ministryOf works is high
SCOPE OF THE
STUDY
The study
focuses on the evaluation ofthe impact of capital budgeting on organizational
performance with a case study of the ondo state ministry of works.
DEFINITION
OF TERMS
CAPITAL
BUDGETING DEFINED
Capital
budgeting is the process in which a business determines whether projects such
asbuilding a new plant or investing in a long-term venture are worth pursuing.
Oftentimes, a prospective project's lifetime cash inflows and outflows are
assessed in order to determine whether the returns generated meet a sufficient
target .Also known as "investment appraisal.Ideally, businesses should pursue
all projects and opportunities that enhance shareholder value. However, because
the amount of capital available at any given time for new projects is limited,
management needs to use capital budgeting techniques to determine which
projects will yield the most return over an applicable period of time.Popular
methods of capital budgeting include net present value (NPV),internal rate of
return (IRR),discounted cash flow (DCF) and payback period
ORGANISATIONAL
PERFORMANCE DEFINED
organization
performance relates to how successfully an organised group of people with a
particular purpose perform a function.
Essentially, this is what we are speaking about when we refer to
organisational performance and achievement of successful outcomes. High
organisational performance is when all the parts of an organisation work
together to achieve great results with results being measured in terms of the
value we deliver to customers.
Strategic
objectives – provide the direction in which everyone within the organisation
should head. They provide focus and
ensure we are all working towards the same end.
Organisational
structure – this represents the form in which the organisation will deliver its
services. The structure must support the
strategy just as the strategy must have regard to the structure. For instance, an on-line delivery strategy
will not be successfully executed unless the organisation has on-line
capabilities.
Business
performance measures – represent the measures by which each area of the
organisation will be assessed. There is
no single set of measures that may be applied across all organisations. In order to be relevant and of use to the
organisation, the measures must be determined in light of the organisation’s
goals and the strategies put in place to achieve those goals. It is this measurement process that will
direct behaviour more than any other system that may be put in place. Further, the information must be easily
obtainable - in a timely manner. This
requires the management information systems to be developed to collect the
right data in an efficient way.
Allocation
of resources and processes – relates to the decision making approach that takes
place within the organisation. It is how
the organisation goes about deciding where to apply its scarce resources –
including money, time and effort - in order to achieve its objectives.
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