Q. Importance of Capital Budgeting Decision?
1. Such Decision affect the profitability of the Firm: - Capital Budgeting decision influences the long-term profitability of a firm. They allow a firm to produce finished goods which is ultimately sold for profit. Therefore a correct investment decision can yield large profits whereas an incorrect decision can endanger the very survival of the firm.
2. Long-Term Effects: - The result of capital expenditure decisions extends far into the future. To exemplify if a company purchases a new plant to manufacture a new product the company will have to incur a sizable sum of fixed costs in terms of supervisor's salary, labour, insurance and rent of building etc If in future the product turns out to be unsuccessful the company will have to bear the burden of heavy fixed costs.
3. Irreversible Decision: - Capital Budgeting decisions, once taken, are not easily reversible without heavy financial loss to the firm.
4. Involvement of Large Amount of Funds: - Capital Budgeting decisions need large amount of funds and most of the firm have limited financial resources. Therefore it is absolutely necessary to take thoughtful and correct investment decisions.
5. Risk: - Capital investment suggestions have different degrees of risk.
6. Most difficult to make: - These decisions are between the most difficult decisions to be taken by a firm. This is for the reason that they require an assessment of future events which are uncertain and difficult to predict.