Need and Importance of Capital budgeting decisions

Capital budgeting decisions are of paramount importance in financial decision. The profitability of a business concern depends upon the level of investment made for long period. Moreover, the investments are made properly through evaluating the proposals by capital budgeting. So it needs special care. In this context, the capital budgeting is getting importance. Such importance are briefly explained below.

Capital Budgeting

Importance of Capital Budgeting Decisions

1. Long-term Implications of Capital Budgeting: A capital budgeting decision has its effect over a long time span and inevitably affects the company’s future cost structure and growth. A wrong decision can prove disastrous for the long-term survival of firm. On the other hand, lack of investment in asset would influence the competitive position of the firm. So the capital budgeting decisions determine the future destiny of the company.

2. Involvement of large amount of funds in Capital Budgeting: Capital budgeting decisions need substantial amount of . This underlines the need for thoughtful, wise and correct decisions as an incorrect decision would not only result in losses but also prevent the firm from earning profit from other investments which could not be undertaken.

3. Irreversible decisions in Capital Budgeting: Capital budgeting decisions in most of the cases are irreversible because it is difficult to find a market for such assets. The only way out will be scrap the capital assets so acquired and incur heavy losses.

4. Risk and uncertainty in Capital budgeting: Capital budgeting decision is surrounded by great number of uncertainties. Investment is present and investment is future. The future is uncertain and full of risks. Longer the period of project, greater may be the risk and uncertainty. The estimates about cost, revenues and profits may not come true.

5. Difficult to make decision in Capital budgeting: Capital budgeting decision making is a difficult and complicated exercise for the management. These decisions require an over all assessment of future events which are uncertain. It is really a marathon job to estimate the future benefits and cost correctly in quantitative terms subject to the uncertainties caused by economic-political social and technological factors.

6. Large and Heavy Investment: The proper planning of investments is necessary since all the proposals are requiring large and heavy investment. Most of the companies are taking decisions with great care because of finance as key factor.

7. Permanent Commitments of Funds: The investment made in the project results in the permanent commitment of funds. The greater risk is also involved because of permanent commitment of funds.

8. Long term Effect on Profitability: Capital expenditures have great impact on business profitability in the long run. If the expenditures are incurred only after preparing capital budget properly, there is a possibility of increasing profitability of the firm.

9. Complicacies of Investment Decisions: Generally, the long term investment proposals have more complicated in nature. Moreover, purchase of fixed assets is a continuous process. Hence, the management should understand the complexities connected with each projects.

10. Maximize the worth of Equity Shareholders: The value of equity shareholders is increased by the acquisition of fixed assets through capital budgeting. A proper capital budget results in the optimum investment instead of over investment and under investment in fixed assets. The management chooses only most profitable capital project which can have much value. In this way, the capital budgeting maximize the worth of equity shareholders.

11. Difficulties of Investment Decisions: The long term investments are difficult to be taken because decision extends several years beyond the current account period, uncertainties of future and higher degree of risk.

12. Irreversible Nature: Whenever a project is selected and made investments as in the form of fixed assets, such investments is irreversible in nature. If the management wants to dispose of these assets, there is a heavy monetary loss.

13. National Importance: The selection of any project results in the employment opportunity, economic growth and increase per capita income. These are the ordinary positive impact of any project selection made by any company.

Leave a Reply

Recent Posts




Comments


Related pages


inventories turnover daysskimming price strategymixed economy disadvantages and advantagesadvantages and disadvantages of primary research methodscentralisation and decentralisation of authoritywhat is judgement samplingis nigeria a mixed economyppc meaningdefinition of nominal wagefund flow chartadvantage and disadvantage of sole traderdisadvantages of cinema advertisingadvantages and disadvantages of online bankingspeculators of stock exchangezero based budgeting definitionvouch accountingpreparation of a cash budgetdemocratic leadership style advantagesnationalisation of banks in indiafutures vs forwardscustomer relationship mgmtin arrears definitionbenefits of autocracy5 elements of a valid contractreciprocal buyingwhat is the doctrine of ultra vires in company lawretailing definitionprinciples of cooperativesdishourned chequenationalization of banks in 1980how to calculate overhead recovery ratedefine contracteeobjectives of rbiexample of credit cooperativebank nationalisationadvantages and disadvantages of authoritarian leadershipportfolio management advantages and disadvantagesexplain the probability and nonprobability sampling methodssinking fund method of depreciation formulacalculate arrformulating derivative plansfull convertibility of currencypreferential shares meaningwhat is service blueprintingnegotiating bank in lcthe role of financial intermediariesexport pricing and costingtypes of vouchingrandomised samplingadvantages and disadvantages of world bankdematerialised securitiesresale price maintenance exampledefinition of direct labourdirect quote exchange rateorganizational structure of imfar turnover ratio formulafactor price determinationmembers voluntary winding upthe difference between void and voidable contractsmeaning of collateral security in hindiwhy are financial intermediaries so important to an economybounced cheque definitioncreating a cash budgetnon probability sampling examplerbi as bankers bankwhat is a franchise advantages and disadvantagesadvantages of variable costingoperating lease and finance lease differenceitinerant retailers meaningvaishyas jobspresent discounted value calculator