Evaluation of Capital Budgeting Techniques Adopted by Small Scale Firms (A Case Study of Selected Firms, Aranla and Other Small Scale Firms)

PROJECT CODE: 000042
EVALUATION OF CAPITAL BUDGETING TECHNIQUES

ADOPTED BY SMALL SCALE FIRMS (A CASE STUDY OF
SELECTED FIRMS, ARANLA AND OTHER SMALL SCALE
FIRMS)
ABSTRACT
The primary aim of every business organization is to
make profits to ensure its continuous survival and stay in
business. Most firm resort to various survival strategies.
During the course of this study, personal interview were held
with senior officers of the firm selected in addition to
questionnaires. Those interviewed were either directly involved
in evaluating project proposals using conventional methods or
involved in using unconventional method. However, it was
found that two companies Predmount Plywood and Bijou (Nig)
Limited used both the payback and not present value while the
other use informal methods. It was discovered that with the
increasing complexity of this business environment. Owners of
Small Scale firms are either acquiring re-requisite qualification
consisting of degree and diploma of hiring capable qualified
hands. Furthermore, adequate attention to techniques of
capital budgeting. On the strength of the findings, it
recommended among others that there should be exchange of
idea between academician and practicing mangers where by
each will have the opportunities of stepping into the others
show to have a first hand knowledge of what obtains in their
respective five and that firms should assign at least one
specialist to fill time capital budgeting in order to maximize
gain from such practice.
CHAPTER ONE
INTRODUCTION
Capital budgeting is seen as involving the entire
process of planning expenditure whose return are expected
beyond one year. Weston and Brighton (1995) refer capital
to fixed assets used in production, whereas dudget is a
plan which details project inflow and outflowduring some
future period.
Thus means capital budgeting outlines the planned
expenditures of fixed assets. Kac et al., (1991) defined
capital budgeting as a process that helps managers plan
for the acquisition and financing of long-term investment
primary fixed assets.
Duncan Williamson (1996) defined capital budgeting
as the acquisition or disposal of capital assets such as
land building plan; equipment and vehicles. The capital
budgeting decision is one that involves the entire process

of whether to make a capital investment decision. These
definitions are at consent that capital budgeting involves
long term investment appraisal and control.
Organisations are set up to achieve specific objectives
or goals. Such objectives or goals ranges from earning
adequate return on investment to providing social services
to the community. Every organisation plan it activities in
order to employ available resources efficiently towards the
achieving of these set objectives.
Planning can be defined as deciding in advance action
to be taken in future, taken into consideration all the
necessary step resources required to bring them into
reality. Both large and medium and small scale firms see
their objectives through the planning process so as to
ensure optimum allocation of their resources.
Small Scale firms are by their nature not practically

easy to define because, the expression covers a wide range
of activities which are related to social and economic
development stage of a country Management Science in
Delfe University, Netherlands (1993) define small scale
firms as one of which the manger personally performs all
the function of managing 10 19 persons. Aluko (1992)
defined the upper and limit of small scale firms as to suit
its own environment and purpose in the light of the level of
industrial
development.
The
small
scale
business
administration United State government agency aim at

protecting and promoting small scale firm given multiple
definition, guideline or provision for small scale firm are as
follows:
1) Independently owned and generated
2) Not domination in its field of operation
3) Maximum number of employee shall vary from

industry to industry.
4) Maximum collar volume of business.
In Nigeria and many African and Asian countries,
crafts and cottage firms form or classified as small scale
industries. Given our stage of industrial development, the
following definition have been given or offered by different
institution over time. In central Bank of Nigerian (CBN)
credit guideline in commercial and merchant banks since
the late 90s, no small scale firm are defined as an
organisation with annual turnover.
Furthermore, small scale firms were defined by
NERFUND as those with fixed asset not more than 2
million when the naira was exchanged at 5 to $1, but
with continuous depreciation in naira, the above definition
has become unrealistic that small scale were regarded as
those with fixed asset not more than 36 million. Aluko et

al., (1992) gave hepatitis of small scale firm to include:
1) The same manger/proprietor take charge of the
functional activities such as finance, production and
marketing.
2) The industry is closely integrated with and meets
only the immediate needs of the local community in
which he arises on the business.
3) The level of education of the proprietor is usually
very low with a consequent low level of business.
Management
techniques,
skill
or
marketing
information. He also fails to plan for management

succession like large and medium scale firm, the
investment
decision
of
small
scale
firm
are
commodity called budgeting or capital expenditure

decision.
In addition, as reported by Soludo (1994) in line

study of manufacturing firms, small-scale firm have to be
cash oriented.
They are pre-occupied with how to survive, hence
they focus their attention on expenditures from the
standpoint of their nearer team effect on cash and survival
instant was, then to concentrate on the relatively short
time horizon and thus in turn lea to an emphasis on the
payback period. To this extent, small-scale industries have
selected to be used as a study in this research.
1.1 Statement of Research Problem
The future success and growth of a business depend
on the investment decisions made today. All investment
decision are usually approved by the chief executive or
board of directors. This fact is an open secrete among
business managers. Inspite of this fact, the procedure used
to help management made (investment decision) or often

inadequate and misleading. Studies carried out suggest
that among small scale industries use back-of envelop
analysis or perhaps even no analysis at all. Brighan
(1998). For instance, in a study of small manufacturing
firm in Lowa, USA Soludo (1994) disc overed that more
than 50 percent of the companies rely fully on payback or
similar criteria and over 40 percent used no formal
analysis at all. The above result is puzzling and band
bewding. They often neglect the use of the conventional
decision on making techniques developed to improve
decision by small business even through most of their
manager appreciate the importance of capital budgeting
has been explained by various argument some of which
consist:
- that manager of small firms are simply not well

trained
- that management talent is a scare resource in small
firms.
- That the cost of analysis capital projects are fixed
therefore, it may not be economical.
1.2 Objective of the Study
The role played by small-scale firms in developing
country like Nigeria can better be appreciated by looking at
their roles, there is need for their sustained growth and
stability.
The objective of this study therefore is to evaluate the
following.
- whether or not small-scale firm practice capital
budgeting techniques as theoretically postulated.
- Whether
risk
and
uncertainty
factor
normal
associated with investment decision are taken into

consideration.
- Whether the Nigeria environment (economic and
business peculiarities vis--vis those of the selected
firm prevent from making use of such sophisticated
techniques.
- If the general perceived low level of education among
small scale business mangers is also responsible for
the neglected use of conventional decision making of
the selected firms.
1.3 Research question
1) Conventional capital budgeting technique are not
used in practice by small scale firm.
2) Low level of education background and lack of

managerial expertise is responsible for their choice of
unsophisticated technique(s).
3) The Nigerian government (economic and business)
peculiarities hinder the selected firms from making
use of conventional method.
1.4 Significance of Study
This study is informed by the need to ascertain whether or
not
small-scale
firm
employ
sophisticated
capital
budgeting technique in appraising their project proposal.

The significant of the study is therefore under scored
by the following.
1. That knowledge of capital budgeting techniques is
very vital since decisions are critical to the success or
failure of any organisation.
2. An
awareness
and
understanding
their
global
application of capital budgeting theory and practice

are hindered by environmental factors, will enable us
to bend such theory and practice to suit local
circumstances.
3. That explicit recognition and provision for risk in
capital budgeting decision by managers of small scale
business will likely reduce the incidence of project.
1.5 Scope and Limitation of Study
Information is scanty on the exact budgeting techniques
used by small firms in developing countries. However,
there is evidence that such firm in Nigeria generally make
use of unconventional methods. This study is therefore
undertaken to cover various tools develop over ages viz.
The payback period, the account rate return, their
application by small scale business firm including the
process capital budgeting and its importance. This study

work is however greatly limited by the short-term period
within which it has to be completed as well as dislocation
of final year student.
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PROJECT CODE: 000042