The study was primarily undertaken to evaluate the processes of capital
budgeting and investment decision in Nigeria. Particularly, it is an evaluation
of the processes of capital budgeting and investment in capital assets in some
manufacturing firms operating in Imo state. This study is aimed at evaluating
the processes and procedures that Nigerian manufacturing firms adopt when
budgeting for their long-term investments and the organizational structures
that drive capital budgeting and investment decisions in the selected manufacturing
firms as well as the impact of the economic environment on their ability to
budget effectively. The study involved a survey of eight (8) out of the
fourteen (14) active manufacturing firms in the state. A sample size of two
hundred and forty (240) respondents was drawn from the selected firms, they
were administered with structured questionnaire. The data collected were
analyzed using tables, frequency, percentages, descriptive statistics, the
t-test of population mean and the z-test of difference of means. The analysis
revealed that: the firms budget for their capital investments using mainly the
payback method of investment appraisal. The researcher therefore concluded that
mangers tend to be overconfident in that they overestimate the precision of
their information and their ability to control risk; and though the sampled
firms understand the obvious advantages of the net present value and the other
sophisticated investment appraisal techniques over the payback method, they
still adopt the later because of the nature of their economic environment,
their size, lack of sufficiently qualified personnel, paucity of funds and
their weak organizational structure. The researcher recommended that firms
should hire risk-averse managers to make investment decisions on their behalf
because the manager’s overconfidence serves to reduce the moral hazard that his
risk aversion creates. Government at all levels in Nigeria should put in place
a revolving fund to meet the long-term funding needs of the manufacturing
sector which most of the banks are unwilling to provide at affordable interest
rates. The present heavy tax burden on manufacturing firms by the Federal,
States and Local governments should be discouraged.
Cite this paper
Obi, A. N. and Adeyemo, S. O. (2014). Evaluation of Capital Budgeting and Investment Decisions in Nigeria — A Study of Selected Industrial Firms in Imo State. Open Access Library Journal, 1, e1141. doi: http://dx.doi.org/10.4236/oalib.1101141.
Awomewe, A.F.
and Ogundele, O.O. (2008) The Importance of the Payback Method in Capital
Budgeting Decision. Blekinge Institute of Technology, Blekinge.
(Unpublished Work)
Stein, J.C.
(2003) Agency, Information and Corporate Investment. In: George, M., Constantinides,
M.H. and Stultz, R.M., Eds., Handbook
of the Economics of Finance, Elsevier North-Holland, Amsterdam, 111-163.
Adams, C.,
Bourne, M. and Neely, A. (2004) Measuring and Improving the Capital Planning Process. Measuring Business Excellence, 8, 23-30. http://dx.doi.org/10.1108/13683040410539409
Angelou,
G.N. and Economides, A.A. (2009) A Compound Real Option and AHP
Methodology for Evaluating ICT Business Alternatives. Telematics & Informatics, 26, 353-374. http://dx.doi.org/10.1016/j.tele.2008.02.004
Prueitt,
G.C. and Park, C.S. (1997) Phased Capacity Expansion—Using Continuous
Distributions to Model Prior Beliefs. Engineering
Economist, 42, 91-110. http://dx.doi.org/10.1080/00137919708903172
Koch,
B.S., Mayper, A.G. and Wilner, N.A. (2009) The Interaction of Accountability and
Post-Competition Audits on Capital Budgeting Decisions. Academy of Accounting and Financial Studies Journal, 13, 1-26.
Ross, R.,
Westerfield, R.W., Jordan, B.D. and Firer, C. (2001) Fundamentals of Corporate
Finance. Second South African Edition, McGraw-Hill Book Company, Australia Pty Limited, USA.