CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Project evaluation is of dual approachies vis-à-vis project and evaluation. Project has to do with investment decision which most of these decision have direct effect in future profitability of the organization either because they will result in an increase in revenue generation or they will bring about an increase in efficiency and cost effectiveness. In the other hand, evaluation has to do with the analysis of the investment to see whether it will be worth while to take decision on it to go ahead with project’s expenditure. According to Aguolu, P.S.O (1997:6), investment decision are the use of funds on long term asset. What is needs in investment should be known before financing decision are to be taken. “A peculiar aspect of these is that they involve future benefits which are in many cases difficult to predict”. The investment decision of a firm are commonly known as “capital budgeting or capital expenditure decision”. Aguolu, P.S.O, (1997:70) “states that capital budgeting decision is that financial decision which involves and outlays of funds in the present time with the expectation of future returns over a period of time”. He further sees project evaluation as one of the capital budgeting processes. On this note, the accountant plays the role of evaluating the suitability and adaptation of the project in relation to profit maximization. Also in evaluation, the project is expected to be measured on incremental basis what determines. The acceptance of a project is it’s changes (positive in the firms revenue, cost and tax strems). In constrast, cash flow that would be changed by the investment should be degraded. 1.2 STATEMENT OF PROBLEM
As a technical and creative aspect of human endeavour, project evaluation requires knowledge, experience and all the skills needed by a manager to perform job effectively. The accountant’s competence in project evaluation during his choice of a project for the organization is very significant. In a free market economy, it is generally delivered that the investors pays for an investments or intrinsic value. The problem here is how can the accountant relate the future cash flow, the expected returns and the degrees of risks associated with the investment to the market economy. Another problem the accountant may be faced with is the calculation formula, he will effectively use the evaluation formula so as to rationalize between theory and practice. These constraints will help us to investigate into the failure of project or why project brings in lower value of expected cash flow stream, even after being selected through the modern method of project evaluation.
1.3 PURPOSE OF THE STUDY
Although the industry under study is a heavy and capital intensive sector and hence require a large sum of money to invest in any commitment of fund and such activities requires a thoroughful analysis to ascertain the validity of such project and the profitability of cash flow streasm. This work is aimed at
- Knowing the role of an accountant in project evaluation and selection.
Ascertaining the extent that project evaluation has helped a corporation in maximizing the benefits projects valuation and selection.
- To ascertain the usefulness of project evaluation in determining the future cash flow stream of project.
1.4 SIGNIFICANCE OF THE STUDY
The importance of every research work is to contribute to the existing knowledge. Therefore, this study will be important to entrepreneurs and managers of corporations in that it will guide them in decision taking / making on investments. Some of the importance also includes
- It will benefit financial analysis as a source of data collection
- It will equally benefit students as a research materials and other seekers of knowledge.
1.5 RESEARCH QUESTIONS
For the purpose of these research, the researcher has decided to formulate some research questions that will serve as a guide and they are as follows:
1. Does project evaluation process have a better cash flow stream?
2. To what extent has projector evaluation helped the oil sector?
3 Has project evaluation and selection helped in improving the corporate health of the organization.
1.6 FORMULATION OF HYPOTHESIS
From the statement of the problems and objective of study, the following hypothesis are formed.
Ho: Does project evaluation process has better cash flow streams.
Hi: Does project evaluation process have a positive cash flow streams.
Ho: Project evaluation and selection helps in improving the corporate health of the organization.
Hi: project evaluation and selection have a positive change in corporate health of the organization
1.7 SCOPE OF THE STUDY
The critical goals of any project evaluation is to determine whether or not given projects are technically fensible, commercially viable economically desirable, managerially sound and financially profitable. The main trust is cost and benefit implications of the project.
1.8 BRIEF HISTORY OF SHELL PETROLEUM DEVELOPMENT COMPANY OF NIGERIA LIMITED (SPDC) The shell petroleum Development Company of Nigeria, (SPDC) is the largest oil and gas exploration and production company in Nigeria. It is the operator of a joint venture in which NNPC holds 55 percent and AGIP 5 percent The company was granted an exploration license in 1983 and discovered the first commercial oil field at Olvibiri in Niger-Delta in 1958 leading to the export of oil in 1958. the federal government acquired 55 percent of the company in 1973 forming the basic of the joint venture operation that persist till today. The company assumed its present day name in 1979. the percent joint operating agreement and memorandum of understanding were last revised in 1991. Today, SPDC products are almost half of the country’s oil form more than 90 oil fields in the Niger Delta area. it also supplies 95 percent of the country’s commercial gas and its oil mining lease area of 31,000 square kilometers containing more than half the country’s oil and gas reserves. The sale of the company’s operation is massive involving an infrastructure of 6200 kilometers of pipeline, more than 100 wells, 87 production stations, 7 gas plants and two large oil terminals at forcados and Bony. The company is divided into two divisions, which are based in Warri in Delta State and Port-Harcourt in Rivers state with a small corporate centre in Lagos, these division operate with a high degree of autonomy and are running in each by a general manager who reports to the managing director in Lagos. SPDC has about 5000 sta of which 95 percent are Nigerians, the majority form the oil producing areas. In addition the company has another 80,000 contract sta mostly Nigerians. SPDC supports a future development and progress for communities in the areas of operations and its aim is to work along side all communities in harmony. The company’s social investment programme dates back to the Igbo’s when it launched an agricultural initiative in Ogboni area. this spread out the Niger-Delta and beyond not only helping farmers by improving crop varieties and farming technique by setting them up in business through cooperatives. More recently, SPDC has been increasingly involved in development project in the fields of health educated and vocational training linking up with non-governmental organisations, which have expertise in these specialist areas. The company’s health progroamme involves refurbishing and reequipping existing rural hospitals. SPDC also grant scholarship each year to students from oil producing communities and sponsors science teachers in rural schools in addition, the company is running vocational courses to unemployed youths to help them acquire skills set-up their own small business. all this, in addition to producing basic amenities including water schemes, roads, school, building and clinics etc
1.9 DEFINITION OF TERMS
PROJECT: Project simply means commitments of financial resources with future benefit expectation. EVALUATION: It is the process for analyzing the investment to see whether it will be found worth while to take decision on it to go ahead with the project expenditure.
CAPITAL BUDGETING: By this, it means the process of planning or purchase of assets whose returns are expected to continue beyond one year.
SPDC: Shell petroleum redevelopment Company of Nigeria
PROJECT EVALUATION: This means analyzing a given project which has to do with investment decision. To see whether it will be profitable to go ahead with project expenditure.
ACCOUNTANT: An accountant is seen as a manager who uses the accounting information to make financial decisions. In modern computers, an accountant makes uses of computer application in the computation process of accounting work for effectiveness of efficiency of accounting information .
1.10 OBJECTIVES OF THE STUDY
The objectives of the study are as follows:
i) To investigate whether project evaluation process have a better cash flow stream.
ii) To examine the extent that project evaluation has helped the oil sector.
iii) To know if project evaluation and selection has improved the growth of the organization.
