Evaluation of Capital Budgeting and Investment Decisions in Nigeria — A Study of Selected Industrial Firms in Imo State

Abstract

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.