University of Zimbabwe
Faculty of Commerce
Department of Accounting
An analysis of the effectiveness of capital budgeting process in the mobile telecommunication industry in Zimbabwe: A Case Study of Econet Wireless Zimbabwe
Tozivepi Desire M
Name of author: Tozivepi Desire M
Registration number: R164112R
Title: An analysis of effectiveness of capital budgeting process in the mobile telecommunication industry. (A Case Study of Econet Wirelees Zimbabwe)
Degree program: Bachelor of commerce Honors Degree in Accountancy
Dissertation supervisor: Mr J.T Chikondo
Year of award: 2017
The author grants the University of Zimbabwe library the rights to produce copy and copies of this dissertation and to lend such copies for scholarly and scientific researches only. This dissertation may be photocopied, scanned, stored in retrievable devices or reproduced only with prior permission from the author. Inquiries concerning reproduction outside aforementioned terms should be sent to the University of Zimbabwe library.
DECLARATION OF AUTHOURSHIP
I declare that this research project herein is my original work and has not been copied or extracted from previous source without due acknowledgement of the source.
Name of Student Signature Date
………/………………../…………………. …………………………………. .
Name of Supervisor Signature Date
This research study is dedicated to my parents Mr & Mrs Tozivepi who have worked hard throughout their life, raised me up and educated me.
I dedicate them this important professional achievement, because without their presence and support I would have not achieved my studies.
This research work would not have been successful without the contribution of many different people. I wish to profoundly thank my Supervisor, Mr Chikondo for his steadfast support, guidance and encouragement during the entire research period.
My gratitude goes to all my lecturers who successfully took me through my courses and in the same breadth provided advice that proved invaluable in achieving my goals.
Special thanks are extended to my friends, Monalisa T Nyamarebvu and Rutendo Magaya for their endurance, unfailing support, continued encouragement, and understanding.
I am also grateful to my parents and other members of my family for their encouragement and support.
To everyone who had a hand in completing this research project I would like to say
May the Good Lord richly bless you.
TABLE OF CONTENTS
Acronyms of Terms iii
List of Tables iv
List of Abbreviations v
List if Figures vi
List of Graphs vii
List of Appendix viii
1 Introduction 1
1.1 Background 2-3
1.2 Problem Statement 3-4
1.3 Research Objectives 4
1.4 Research Questions 4
1.5 Research Hypothesis 4
1.6 Justification of the Research 4-5
1.7 Scope of the Study 5
1.8 Research Methodology 5
1.9 Literature Review 5
1.10 Chapter Summary 6
1.11 Organization of the Study 6
Acronyms of Terms
List of Tables
List of Abbreviations v
List of Tables iv
List of Graphs vii
List of Appendix viii
List of Abbreviations
ZSE -Zimbabwe Stock Exchange
CBD -Central Business District
US -United States Dollar
CEO -Chief Executive Officer
List of figures
List of Graphs
List of Appendix
This research study was triggered by the researcher’s interest by the massive investments particularly by Econet Wireless Zimbabwe in the network expansion and introduction of data services technologies. The level of capital commitments injected in the mobile phone industry requires an effective capital budgeting process. The research aims to explore the effectiveness of the various capital budgeting techniques and risk analysis in the process and how firms in the mobile industry can improve the process.
Chapter 1 of this research project highlights briefly the purpose of the study, as well as the approach taken by the researcher to address the Research problem. Chapter 2 reviews the available literature on capital budgeting. It focuses on capital budgeting techniques, input information in the process and techniques utilized in assessing risk outlining limitations for the sole purpose of having an effective project appraisal process.
Chapter 3 details the research methodology. It shows the type of research carried out and the field work conducted by the researcher. Chapter 4 summarizes the Findings from the author’s observations, and analyses the responses from questionnaires under an umbrella of Presentation and Analysis. Chapter 5 concludes the whole research project and suggests some recommendations as to how to increase the effectiveness of the capital budgeting process.
The overall success of a company depends upon its capital budgeting process, so capital budgeting should be handled properly because it shows the efficiency and financial strength of a company.
Capital budgeting process is very important in companies because it is used to generate returns and profits to the company and its stakeholders.
Capital budgeting is the most important function done by financial managers and it is not only a popular corporate finance topic but one that has been widely researched by academics particularly in international researches. A capital budgeting project is a decision to make a cash outlay to receive future cash inflows, therefore shareholder value is created if the present value of cash inflows exceeds that of the outlay.
J Hall ( 2001), The importance of the capital budgeting process for the firm lies in the fact that relatively large amounts of money are committed for a long time thus once the decision is made to embark on a particular project the process cannot be reversed unless a value destruction decision is taken to salvage what has been invested.
A number of stages, calculations, evaluation methods and refinements to the capital budgeting process can be used and it is these aspects of the capital budgeting process that are investigated in this study and the uncertainty involved in the process.
Capital Budgeting process involves the relationship between a firm’s initial capital outlay, net cash flows as well as the terminal cash flows.
G Muponda (2007), Defines capital budgeting as a process which is subjected to cash flows that is determined to certain appraisal techniques. A capital expenditure is an expenditure on fixed assets and other long-term infrastructure necessary for the implementation of projects. The assets bought for the project are expected to generate cash flows. The appraisal of capital projects is done in two steps. Firstly, we must determine the cash flows, that are expected to be generated by the project. Secondly, we must estimate the cost of funds ( cost of capital ) that have been used in the project. Finally, we subject the expected cash flows to certain appraisal techniques.
1.1 Background to the StudyChinamasa (2009.), “Honorable members will be aware that in the hyperinflationary environment characterizing the economy at present, our people are now using multiple currencies for day to day business transactions, alongside the Zimbabwe Dollar. These currencies include the South African rand, United States dollar, Botswana pula, Euro, pound Sterling, among others. In line with the -+prevailing practices by the general public, Government is, therefore, allowing the use of multiple foreign currencies for business transactions, alongside the Zimbabwe dollar.”
The introduction of the multi-currency system by the then Acting Minister, Hon Cde Patrick Chinamasa saw a new lease of life in local business operations, containment in inflation and a drastic reduction in currency risk greatly associated with the moribund local currency. The new dispensation of the Government of National Unity saw the resurrection of planning and budgeting which had become almost obsolete in the hyperinflationary economy as the political climate calmed and more stable currencies were in use in the transaction process system of the nation.
The era has seen organizations making out capital expenditures either to replace outdated equipment usually inherited before the nation’s independence or equipment for expansion to meet the greater demand for local products. Mining houses, organizations in the communication industry and the beverage sector have been involved in multi-million (US) dollar capital outlays to enhance capacity and realize economic gains in the more stable environment in comparison with yesteryears.
Capital budgeting or investment appraisal is the planning process used to determine whether firms’ long term investments such as new machinery, new plants, new products and research and development projects are worth pursuing. It is a budget for major capital, or investment expenditures of an organization and requires higher accuracy in the decision-making process and involves higher level management.
Therefore, whether in good times or in anticipation of market contractions, the expenditure of cash in exchange for future generated uncertain benefits requires a distinctive decision making structure. Central to this decision making framework is capital budgeting. The capital budgeting process is the decision makers’ primary tool for evaluating the benefits of projects under consideration and for selecting long term investments from among alternative available projects. The methods and analysis used in the acceptance or rejection of a project are important because the commitment to a given capital project involves a significantly large, future oriented sum of money and is frequently irreversible; i.e. the decision, once made, locks the firm into a production technology for an extended period of time. These decisions will directly impact the firm’s expected future earnings and future cash flows as well as their timing and risk levels.
Capital budgeting is the most important function performed by financial managers since results of investment appraisal decisions span for years and a firm loses its flexibility. Therefore a firm’s capital budgeting decisions define its strategic direction as moves into new markets; products are preceded by capital expenditures. Therefore tomorrow’s business success depends on investment decisions made today, prospects or aspects of the investment decision which are used to help management make investment decisions are often inadequate and misleading (J.H. Hall 2001). Business organizations are continually faced with the problem of deciding whether the commitment of resources i.e. time and money, is worthwhile in terms of the expected benefits. If the expected benefits are likely to accrue over a relatively long term, the solution is more complex and chances of making an incorrect decision increase (Bierman ; Smidt 1993).
Mobile Telecommunications have an important role to play Zimbabwe development. The extent of contribution these business units can make towards the growth and development of Zimbabwe is dependent on the level of success attained by their operations. The fact is that, underlying the success of a business enterprise is the establishment and application of controls by the owners or management in addition to the systematic record keeping of business transactions, which at the end of the period, keeps the owner well informed about the performance of the business.
Furthermore, analysis of capital budgeting is needed so that financial statements will be fairly and consistently describe as a financial performance. Without information and standards, users of financial statements would need to learn the accounting rules of each business, and comparisons between the firms would be difficult.
In Zimbabwe Mobile Telecommunications have dominated on the Zimbabwe Stock Exchange (ZSE) with respect to Econet Wireless Zimbabwe. The head offices are usually located in the Central Business Districts (CBD).
1.2 Statement of the ProblemThe selection of capital investments is one of the most important strategic decisions financial managers of a firm can make therefore capital budgeting is one of the most decisive influences on firm value, competitiveness and ultimately, survival.
The motivation to undertake this study stems from the better outlook in the nation though hinged on the success of the inclusive government which has resulted in capital expenditures being undertaken therefore necessitating a critical analysis of the appraisal methods in the wireless communications industry, particularly the three service providers Econet Wireless Zimbabwe, Net-one and Telecel Zimbabwe.
An industry requiring large capital outlay with a vast untapped market in Zimbabwe, and high potential for exponential growth, the telecoms industry is on its boom. The use of multiple currencies spawned massive investments in the sector as mobile operators embark on programs to grow their subscriber base. The industry having endured a decade long of underinvestment as the economic crisis took a toll on the sector, the massive expansion programs have resulted in the increase in the mobile penetration rate to 21% as of August 2009 from 14% in February 2009. Mobile penetration rate describes the number of active mobile phone numbers, (usually as a percentage) within a specific population.
“The equipment facility is valued at US93.9m. We have not been able to identify a bank or an equipment supplier willing to take the financial and political risk for such a large facility to a Zimbabwean company.” (Econet CEO, Mr. Mboweni in response to a question by financial Gazette reporter, Munyaradzi Mugowo.)
The aim is to analyze the applicability of investment appraisal techniques in an environment of high political risk, and bring out limitations in such tools. Thus the statement, ‘An analysis of capital budgeting process: mobile telecoms sector’
1.3 Research Objectives
To bring out the limitations faced by a financial manager when using investment appraisal techniques for making capital expenditure decisions in environments of political uncertainty.
To establish the importance of capital budgeting.
To test the effectiveness of investment appraisal techniques.
To determine strategies used by financial managers in the capital budgeting process.
1.4 Research Questions
What are the limitations faced by a financial manager in using appraisal techniques?
What strategies are used by financial managers in the capital budgeting process in an environment of uncertainty?
What is the effectiveness of investment appraisal techniques in decision making?
How significant is the analysis of capital budgeting in the mobile industry?
1.5 Research Hypothesis
Ho: A firm in an environment of high uncertainty and risk when assessing complex projects uses sophisticated capital budgeting techniques and risk based analysis.
H1: A firm in an environment of high uncertainty and risk when assessing complex projects does not use sophisticated capital budgeting techniques and risk based analysis.
1.6 Justification of the Study
Extensive research has been carried out under normal economies and on a general spectrum. Very little has been produced on the effects and implications of the analysis on the telecommunication industry concern’s capital budgeting. The telecommunication industry is one of the sectors that received the hardest blow of the budgeting process and therefore warrants a further probe into the problem especially considering the fact that the telecommunication sector contributes significantly to the Gross Domestic Product (GDP) of the country.
This research is going to draw attention of the management on the analysis of the capital budgeting process in the telecommunication industry for planning, organizing as a means of decision making. The study is also designed for evaluation of the analysis of capital budgeting process in telecommunication industry and can be used for future interested researches in capital budgeting.
1.7 Scope of the Study
Econet Wireless Zimbabwe, having made the largest investment into its network of US$115m as reported in the interim results for the half year ended 31 August 2009, including Telecel and Net-one who also have planned expansion projects.
Conceptually the study hovers around the implicit role proper analysis of capital budgeting and the techniques play far as mobile sectors business were in concern in Zimbabwe. The research was limited to Econet Wireless in Zimbabwe due to my schedule. The effectiveness of the various capital budgeting techniques were also put into consideration.
1.8 Research Methodology
Research Methodology gives a brief overview that the study intends to employ. Appropriate theoretical and empirical lessons to be drawn from the review of literature will assist shape the methodology. Therefore this section highlights the methods I will use in gathering information for my research. I will issue out three questionnaires to financial managers in the wireless communications industry to get their views on my topic. I am also going to interview the budgeting staff from Econet Wireless Zimbabwe in order to get views on the analysis of their capital budgeting processes. I will compare the information I will get from Econet to the information from the other companies in the telecommunication industry.
1.9 Literature Review
I will review literature from a wide variety of authors in relation to capital budgeting and its analysis to the telecommunication sector. Capital budgeting methods and concepts such as evaluation of fixed assets and net value of cash flows by Du toit, Ray and others will be reviewed so we can understand the analysis to telecom activities.
1.10 Chapter Summary
In a summary, chapter one gives introduction of the research topic of the analysis of capital budgeting in the mobile telecommunication industry in Zimbabwe. The research is carried out in order to determine the function, components, theories and concepts of capital budgeting affects the performance of the industry. The research will provide information about the budgeting of the capital of the company assist in the investment decisions.
This will be beneficial to companies in the mobile telecommunication sector taking into account an analysis of capital budgeting in reporting investment situations. Hypothesis would have proven and defined clearly the effectiveness and efficiency of capital budgeting in relation to the performance of Econet Wireless Zimbabwe.
1.11 Organisation of the Study
This project has five chapters, which are organized as follows:
Chapter one- Gives an introduction of what the author wishes to achieve and a layout of how it shall be solved.
Chapter two- Literature review
Chapter three- Research Methodology
Chapter four- Research Plan
Chapter five- References