An Appraisal of Capital Budgeting Decisions in Government Parastatals



What led to the concept of capital budgeting are numerous like, should we replace the equipment?  Should we add the product to our line?  Such decision have significant effects beyond the current year, they are called capital budgeting decision.  Capital budgeting decision current funds most efficiently in the long term asset in anticipation of an expected flow of benefits over a series of years.

Capital budgeting or capital expenditure decision on defined by Osisioma (1989) a budget is a formal expression of managerial planning quarantitatue and financial term encompassing different phases of business operation and aimed at helping management forward the attainment of organizational objective.

Capital budgeting is process of identifying, evaluating, planning and financing major investment project of an organization (News watch 31, 2000).

Hairo Levy & March & Scenat (1979) defined capital budget as the formulation and articulation of long term goals, secreting, marketing financial forecast and estimates.

Decision to expand production facilities, acquire new production machinery, buy a new computer or remodel the office building is all examples of capital expenditure decision.

Capital budgeting decision made now determines to a large degree how successful an organization will be in achieving it’s goals and objectives in the year ahead.

Capital Investment decision are extremely important and top management usually assume direct responsibility for the authorized substantial expenditure.

Capital Investment decision deserves the attention of top management because:

  1. i) Substantial sum of money which are usually invested and committed for long period of time.
  2. ii) The resources that are invested in project are often committed for a long period of time.

iii)    It may be difficult to reverse the effects of a poor decision.

  1. iv) The success of failure of the company may depend upon a single or relatively few investment decisions.
  2. v) Plans must be made will into an uncertain future.

The investment decision affects the firms valve capital budgeting is a way sided activity that includes searching for new and more profitable investment proposals, investment engineering and marketing considerations to predict the consequence of accepting the investment profit potential of each investment proposal.  Capital budgeting is one most important management functions personnel from accounting, finance, marketing and production may be involved in the decision analyze, because capital expenditure decision involve large commitment of resource both time and money management must install a decision analyses system that provide carefully developed and accurate information concerning capital expenditure requests.


Capital budgeting plays an important role in the long range success of many organizations because of several characteristics that differentiate it from most other element of the master budget.

According to HEITGER AND METULICH (1980 pg. 476).  Most capital budgeting project required relatively large commitment of resources major projects such as plant expansion or equipment replacement, may involve a source outlays in excess of annual net income.  Most capital expenditure decision are long term comments project that last more than one year and may extend over five, ten or even twenty years.  The longer the time period affected by the project the more difficult it is to predict revenues, expense and most savings.  Capital budgeting decision involve large policy decision and should rest firmly on organization policies concerning growth, marketing, industry shares, social responsibility.


This are many ways to classify investment, one classification is as follows:

1)     Project expansion of business:  A company adds capacity to existing product line to expand existing operations.  For example a fertilizer company may increase ts plant size to manufacture area.

2)     Project Expansion of product line:  Facilities may be increased to enable the company to add a new product line.

3)     Replacement of existing assets:  Physical properties issue to be replaced from time to time because of physical wear, obsolescence and in adequacy.

4)     The prestige investment:  Sometimes an investment will be made without any prospect of a direct economic benefit.  A company laid scopes its grounds redecorates its official, and provides recreational facilities return.

5)     The urgent and necessary investment:  In some cases, a company is forced into making an investment.  If a machine that is essential to the manufacturing operation breaks down completely or is destroyed.


According to BATTY (1998 page 459).  The research are;

  1. It shows the possibility on expanding the production facilities to cover the additional sales shown in the sales forecast.
  2. It shows alternative forms of assets to be considered as replacement for asset, which are wearing out or one in danger of becoming obsolete.
  3. It facilitate the making long term plans and assets in the formulation of policy.
  4. Enable the cash forecast to be completed. Usually there will be other cash commitment and these too will have being known to be able to complete cash forecast.
  5. Assists in formulating a sound depreciation and asset replacement policy.
  6. May be useful when considering methods of reducing cost.
  7. The feasibility of replacing manual work by machinery may be seen from capital forecast.
  8. The capital of improving working condition or safety can be obtained through capital expenditure forecasting.


Agbai (1990) stated that a good budget as the summary of what a business intends to do over a specified period of time.  According to Kontz (1981) said that capital budgeting have meaning only when they are backed actionable plans as programs.  He also state that capital budget have various objective.

The one basic objective of financial statement which should surprise no one as to provide information useful for making economics decision.

  1. To provide information useful for producing, comparing and evaluating potential cash flows to them in term of amount, turning and related.
  2. They serve primarily those users who have limited authority, ability or resource to obtain information and who rely on these statement as their main source of information about their enterprise economic activities.
  3. Finally, financial statement serves government and non profit organization in that it provide information useful evaluating the effectiveness of the management of resource achieving the organizational goals.


Agbai (1990) stated that a budget might be establishment and unaltered for considerably a long period of time or established for use to suit current conditions.

Copcland (1999) stated that the purpose of budgeting and capital budgeting.

  1. To communicate with or inform others about the goals and the methods selected by top management so that all managers will understand and support the budget.
  2. To state expectations in formal terms so that most underlying assumption may be identified.

iii.    Co-ordinate all factors of production so that subordinate can achieve common objective.

  1. To establish expectations as a frame work of judging performance. Some of the qualitative characteristics of financial reporting are:
  2. Relevance and Materiality
  3. Form and substance
  4. Reliability
  5. Freedom from bias
  6. Comparability
  7. Consistency
  8. Understand ability


Agbai emphasis critically in the above section is on elements of quantitative factors.  It should be recognized nevertheless that certain factors of decision might no be readily quantifiable.  Such factors are refers to as quantitative factors.  It should be recognized nevertheless that certain factors of decision may not be readily quantitative such factors are referred to as quantitative factors.

  1. a) The impact of a capital budget on the environment and loyalty of employee.
  2. b) Social capital projects on macro economy.
  3. c) The impact of a capital project on government will
  4. d) The impact of a capital project on the morale environment.
  5. e) The impact of a capital project on good will of community.

[simple-links category=”3208″]

Leave a Reply

Your email address will not be published. Required fields are marked *