Table of Contents

1. Background................................................................................................................................1
1.1 Problem statement...................................................................................................................1
1.2 Research objectives.................................................................................................................1
2. Brief history of fidelity bank plc...............................................................................................2
3. Decision criteria.........................................................................................................................2
a. The payback period................................................................................................................2
b. The accounting rate of return.................................................................................................2
c. The net present value (NPV)..................................................................................................3
d. The internal rate of return (IRR)............................................................................................3
6. Risk analysis................................................................................................................................3
6.1 Sensitivity analysis..................................................................................................................4
6.2 Scenario analysis.....................................................................................................................4
6.3 Decision tree analysis..............................................................................................................4
6.4 Simulation...............................................................................................................................4
7. Measuring performance................................................................................................................4
7.1 Return on investment (ROI)....................................................................................................4
7.2 Return on asset (ROA)..........................................................................................................5
7.3 Return on capital employed (ROCE)...................................................................................5
7.4 Cost benefit analysis (CBA).................................................................................................5
7.5 Economic value added (EVA).........................................................................................6
8. Conclusion and recommendation...............................................................................................6
9. REFERENCE...........................................................................................................................7
 1. Background
The capacity of a firm to earn returns on its investments is critical to its existence. For capital
expenditures to be worthwhile, they must be funded with substantial quantities of money, and the
rewards may last for years. Capital budgeting is one of the most important decisions made by
management, as it determines the appropriate project to invest in to assure growth and future
profitability (Munyana, 2020).

Capital budgeting, according to Kadvondi (2021), is a good way to assess financial performance
of a company. The average stock market change per year is used to assess the success of a
company over time. Stock price changes are generally used to calculate this value. Stock price
information, on the other hand, may make it difficult to measure financial performance due to the
following reasons: lack of information on investment practices available to shareholders;
managers place a much higher priority on return on capital and profit growth than shareholders'
goals; and lack of information on investment practices available to investors.

Accounting methods may be the most accurate approach to assess better performance if
management value return on capital and profit growth more than shareholders' aspirations.

1.1 Problem statement

A firm's goal, according to financial theory, should be to maximize shareholder wealth.
Accordingly, the best investment options are those that increase the owners' net worth Using
sophisticated capital planning strategies, companies can improve or even maximize shareholder
wealth. Finance theory predicts that both capital budgeting and financial performance will be
favorable. Research on capital budgeting complexity and financial success of a firm has produced
contradictory results. The lack of a local study on the impact of exchange rate budgeting
prompted this study to examine the relationship between financial analysis and financial results at
Fidelity Bank plc and evaluate the other determinants that affect the choice of task to be
accumulated in, based on the available information.

1.2 Research objectives

Following are some of the research objectives of this report.
 Investigate Fidelity bank plc's capital budgeting procedures.
 See whether there is a link between Fidelity bank's financial success and its capital
budgeting strategies
 Determine the level to which Fidelity bank plc uses capital budgeting strategies to
maximize the wealth of shareholders.
 2. Brief history of fidelity bank plc.

At the time of its founding in 1988, Fidelity bank plc was called fidelity bank of merchant union
limited. By 1990, it was the fastest growing merchant bank in the UK. It became a commercial
bank in 1999 after the Central Bank of Nigeria, the National Banking Regulator, issued a
commercial banking license. Fidelity Bank plc was the new name given to the bank in the same
year. Upon becoming a universal bank in February of 2001, it was granted a license to provide all
types of banking services including commercial, consumer, corporate, and investment. In
December 2005, fidelity bank merged with PSB international bank plc and many bank plc under
the fidelity brand name to establish the present fidelity bank.

3. Criteria for decision making

As far as capital budgeting is concerned, the decision criteria are computed metrics that may be
used to determine the flow of funds for different projects. Understand the existing decision
criteria before making a final judgement. The payback time, accounting rate of return, internal
rate of return, and net present value are only a few of the choice factors that may be considered.

a. The payback period

It is defined by Lofstrom (2015) as the time it will take for aggregate positive cash flows to equal
original costs, i.e. when an initial investment will be recovered. An investment's or company's
payback period is the time it takes to recover or repay project costs. A cutoff time is provided in
order to apply the method as a criteria. Ineligible are any initiatives that have a payback term that
is longer than the cutoff period. PB method is popular among managers since it is straightforward
and easy to grasp when presented with mutually incompatible options Aside from saving time and
effort for management, it is also a convenient approach to utilize in capital-rationing
circumstances. As the cash flows are simply added up and compared to an initial beginning
amount, this approach fails to account for any cash flows that occur beyond the payback period,
as well as the temporal value of money for time (TVM).

b. The accounting rate of return

To calculate the Accounting Rate of Return (ARR), Kadondi (2002) divides average tax profit by
the original cash investment. In accounting, the ARR was a measure of an investment's return on
investment (ROI). Managers would select projects with the greatest ARR using this technique.
With this technique, you may evaluate projects on the basis of their profitability while utilising a
well-known percentage notion. Due to the fact that it overlooks the timing of cash flows and is
based on accounting income rather than actual project cash flows, this technique is unreliable.
The technique does not take into account the time worth of money either.
 c. The net present value (NPV)
For the purpose of budgeting, the NPV is the criterion that is widely recognized as the most
accurate choice. As the name suggests, it is the current cash flow. An alternate term for this
discount rate is "opportunity cost of capital." For those projects with an NPV larger than zero, the
NPV decision rule requires extra evaluation. For cash flows to be positive, they must exceed the
discount rate. Anything that increases the worth of the firm by more than the opportunity cost is a
good thing (Farrangham et al, 2019).

In addition to considering the timing of all cash flows, NPV is a measure of the extra value that is
expected to be added to a company's value as a result of a project. However, NPV assumes that
all cash flows generated by a project may be reinvested, while NPV does not.

d. The internal rate of return (IRR)

As the name suggests, an IRR measures a project's return on investment, or ROI (ROI). IRR = 0
when discounted rate provides an NPV of 0. Using the IRR as a discount rate, the present value of
the anticipated future cash flows is equal to the project's initial cost. They would accept any
project with a higher IRR than the capital opportunity cost, as long as the project is independent.
IRR standards are faulty according to Kandoni's (2019) research. IRR is a faulty tool since it does
not comply to the value-additivity principle, meaning that managers who use it are unable to
analyses projects in isolation. Second, the IRR rule suggests that money spent on initiatives has
opportunity costs equivalent to the IRR for the project, which isn't necessarily the case. Cash
flows must be discounted based on the market-derived opportunity cost of capital, which is
decided by the market. This criterion can lead to several different rates of return if the cash flow
sign changes more than once, which is fairly uncommon.

6. Risk analysis

A company's long-term viability is affected by capital projects. The need of understanding why a
project may fail is crucial for organisations specially for the banks like fidelity ltd. Using best
estimated projected cash flows to calculate a decision criteria is therefore insufficient, as it does
not reveal the amount and nature of project risks (Linstorm et al, 2019). There is a need to better
understand what might go wrong and how it will affect the project. For this aim, a number of risk
analysis methodologies have been created.

The following risk for the fidelity bank will be analyzed in this area:

Sensitivity risk analysis, scenario analysis, decision free analysis and simulation.
6.1 Sensitivity analysis
Both the NPV's response to changes in the critical variable and its range of possible values
are taken into account in the fidelity bank for this purpose. It involves managers looking at
a variety of options that are then categorized.

6.2 Scenario analysis

Both the NPV's sensitivity to changes in key variables as well as the range of expected
variable values are taken into account in the fidelity bank for this purpose. It involves
managers looking at a variety of options that are then categorized.

6.3 Decision tree analysis

Useful in multi-stage or sequential choice situations when more than one variable may be
reliant on the value of another variable in fidelity bank. To depict the complete range of
possible outcomes, decision trees are used. As a result of its logical examination, a full
plan may be developed to cover all possible outcomes.

6.4 Simulation
Practice dictates that all possible outcomes of a project must be considered separately,
such as alternate sales income outcomes and alternative cost estimates, etc. There are
hundreds of branches to a decision tree. As a result, the cash flows may be connected over
time; for example, it is also likely to be successful in the years to follow. Simple decision
tree analysis cannot handle this circumstance and must be replaced with a computer-aided
simulation analysis.

7. Measuring performance
There are several traditional metrics of business performance. ROI, ROA, ROCE, EVA
and CBA are some of the most used metrics. These metrics will be discussed in this
research.

7.1 Return on investment (ROI)

Corporate performance is often measured in this way. R.O.I. (return on investment) is the
ratio of financial gains or advantages that may be expected from a project versus its
expenses. An expected return on investment (ROI) is expressed as the difference between
the project's total expenses and its expected return on investment (ROI). This formula is
used to compute it.
 ROI= Net benefits/ total costs

In order for an investment to be economically desirable, it must have a return on

investment (ROI) of larger than zero. Calculating the return on investment (ROI) of
several choices will assist a firm choose the most cost-effective and lucrative project.
7.2 Return on asset (ROA)

An indicator of how lucrative a firm is in relation to its total assets, this is a measure of
profitability. ROA is determined by dividing a company's yearly earnings by its total
assets. It is calculated in the following manner:

ROA= profits before interest and tax/ total assets

In other words, it shows us how much profit was made from our investments (assets). The
return on equity (ROE) of public firms can vary widely and is largely reliant on the sector
in question.
7.3 Return on capital employed (ROCE)

One of the most significant operational ratios is the Return on Capital Employed (ROCE),
which is a measure of a company's ability to manage as well as of the overall economic
climate. Businesses with a high return on investment are likely to be extremely
successful. Trading Profits Capital Employed provides ROCE.

7.4 Cost benefit analysis (CBA)

As a general rule, Cost-Benefit Analysis (CBA) is performed for big public works
projects with social advantages that are more difficult to quantify. All of these intangible
benefits are important in determining what constitutes an effective public investment. The
result of Cost Benefit Analysis (CBA) is a ratio expressed as a percentage, while
economic attractiveness follows the same formula: anything above zero is desirable, and
anything below zero is undesirable. Despite the fact that more costs and benefits are
evaluated, the calculation remains the same
7.5 Economic value added (EVA)

Corporate governance has made it imperative to consider if a choice adds any value in
terms of evaluating its effectiveness (Malik and Rakshit, 2016).
8. Conclusion and recommendation

According to the study's objectives Fidelity Bank Plc's capital budgeting procedures and
the impact of such approaches on profits per share are examined. According to the
results of most research, capital budgeting is done using both conventional approaches
and discounted cash flow techniques. The repayment technique and the accounting rate
of return are included in the nave method. Net present value and internal rate of return
are two of the discounting cash flow methodologies, often known as smart capital
planning. It appears that many firms favor the payback technique and the internal rate of
return correspondingly.

Research suggests capital budgeting strategies might lead to better financial outcomes.
To support this, several arguments have been put forth: More recent capital budgeting
methodologies, such as NPV and IRR, have a positive relationship with return on asset
(ROA), whereas earlier methods have an insignificant one. Comparable studies have
indicated that capital budgeting and financial performance have a negative association,
on the other hand.

Even though advanced capital budgeting methods are widely employed, research has
found no link between performance and capital budgeting. The application of analytical
tools, therefore, may not be adequate to enhance performance. It is possible that other
variables like as product development, marketing, and CEO recruitment and training as
well as labour relations are more significant. However, local studies have focused on the
implementation of capital budgeting strategies in listed businesses, as well as the
banking industry, where the nave capital budgeting approaches were found to be the
most prevalent. Da there are contradictory findings in research, and there is no local
study on the impact of capital budgeting strategies on financial performance, this study
attempts to determine the impact of capital budgeting approaches on financial
performance at Fidelity Bank plc.
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