CHAPTER ONE

1.0   INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Capital budgeting can be explained in the context of a firm’s decision to invest its current funds in long term activities in anticipation of an expected flow of future benefits over a number of years. However, the investment decisions could be in the form of acquisition of additional fixed assets, replacements and modifications of activities or expansion of a plant. Therefore, the financial manager should give due consideration to the following factors when capital budgeting decisions are involved:

1. Availability of investment capital and its alternative uses
2. The huge expenditures or large cash outlay
3. The gestation period between initial expenditures and returns and
4. The expectation of higher returns because of factors (a) and (b) above.

Based on the factors above, the manager must not fail to make appropriate investment or selection of good projects because, the volume of fixed assets to exceed current assets and the owners of the company (shareholders) are long term investors, whose high expected returns can only be met with the higher returns from long term assets. These assertions, call for the need to examine the different methods of selecting investments in long term assets which will be discussed in chapter 2.

Therefore, it is the responsibility of management to search for profitable investments by evaluating each investment proposal critically both in terms of its expected cash flows and benefits.

Project proposals must be thoroughly evaluated to determine their economic viability and profit potential and estimating the risk involved and the extent to which this will affect the organization.

Thus, investment decisions are increasingly determining the direction and pace of a company’s future growth and limit the opportunities open to it in much way that the rail tracks determines the speed and direction open to locomotion train. The research is on Coca-Cola Company (Kaduna), to know how they invested on long term projects such as land development, acquisition of fixed assets for production, through the use of capital budgeting techniques as a strategy for good project management.