Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.7, No.10, 2016 73 Capital Budgeting Processes and Wealth Maximization Objective: Implications for Firms in Nigeria. Uwem Etim Uwah (M.Sc, ACA) 1* Akabom Ita Asuquo (PhD,FCCA) 2 1. National Teachers’ Institute, P.M.B. 1058, Uyo, Akwa Ibom-Nigeria 2. Department of Accounting, University of Calabar, P.M.B. 1115, Calabar- Nigeria Abstract This paper examined how capital budgeting processes result in the wealth maximization objective of firms in Nigeria. Data were obtained from both primary and secondary sources using the explorative research design. The findings revealed that proper identification and selection of projects becomes necessary, using capital budgeting techniques and processes and adopting those projects that would maximize the wealth of the owners through value addition to the capital of the firms. It concluded that adopting the necessary techniques and implementing them implies using capital budget processes to actualize the objectives of the firms. The paper contributes to the literature on capital budgeting as a multi-faceted process aimed at making screening and preference decisions by management, on which long-term project should be embarked on. It recommended that firms in Nigeria should entrench the capital budget processes in the firm and be seen to follow it as aproved and authorized by the board. This would result in better performances by the firms in Nigeria. Keywords: Capital Budgeting Processes, Net Present Value, Wealth Maximization, Investment Appraisal. 1. Introduction The accounting principle of “going –concern” implies that a firm will continue in existence for a long time to carry out its objectives and will not be liquidated in the foreseeable future. For promoters of companies therefore, it will not be in their interest to set up firms with short-term objectives. The objectives of any corporate organization with a going –concern status revolve around profit maximization, wealth maximization and non- financial objectives. Contemporary Management Accountants have been advancing arguments on the supremacy of wealth maximization over profit maximization. Wealth maximization is known to maximize the net present value of a firm, as opined by Akinsulire (2010). The wealth maximization objectives of the firm involve increasing the earnings per share of the owners and timing of returns to obtain the net present value of an investment. This principle keys into the concept of the long-term value of the firm, which every shareholder desires, alongside profitability. It is expedient to note that before a firm could survive in the long-term, there must be a determination of the corporate strategy, which is its broad set of objectives, for future investment. Therefore when a firm’s objective is established, the firm continually evaluates possible investment projects, using capital budgeting as an ongoing process. The firm achieves its corporate strategy by making investment in long lived assets that will maximize shareholders’ wealth. Capital budgeting, which is the process of selecting alternative long-term investment opportunities, has the process of committing funds into long-term projects, according to Peterson & Fabozzi (2002). The processes involved in capital budgeting decision as enunciated in this paper are: i. Investment identification and selection ii. Project evaluation /capital budget proposal iii. Budgeting approval and authorization iv Project tracking /development v Monitoring and control of projects vi Post completion audit. All these processes have sensitivity analysis as the pivot. The implications of capital budgeting processes and wealth maximization objectives of firms are indicated in the net present value of an action. This can be seen as the difference between the amount of investment needed for the project and the gross present value derived from the investment. The terminology used in this measurement is known as investment appraisal. This is done by discounting or capitalizing its benefits at a rate which reflects their timing and uncertainty (Drury 2006).The implications are also indicated when a financial action which has a positive action resulting in negative NPV should be rejected because if accepted it will diminish the existing wealth. Another implication stands on the fact that mutually exclusive projects with the highest NPV should be adopted and those with lower NPV dropped. By using these criteria the wealth or NPV of the firm will be maximized. 2. Making Investment Decisions Peterson and Fabozzi (2002) say that investment decision involves the identification of viable projects. This is done by appraising projects using various techniques to determine the viability. Management is always brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals