Capital budgeting is important

    Capital budgeting or investment decision is of considerable importance to the firm since they tend to determine its value by influencing its growth, probability, and risk. 

    Merits significance of capital budgeting :

    Capital budgeting decisions are of paramount importance in financial decision-

    making. In the first place, such a decision is after the probability of a firm. They also

    have a bearing on the competitive position of the enterprise mainly because of the

    fact that they are related to fixed assets. The fixed assets represent, in a sense, the

    true earning assets of the firm.

    The importance of capital budgeting is discussed as below:

    1.Ensure proper investment :

    Investment expanded due to future demand for the product. So, if sales forecasting

    is not accurate, then investment in fixed assets may be in shortage or excess. Capital budgeting is free from this difficulty.

    2. Growth:

    A firm’s decision to invest in long terms assets has a decisive influence on the rate and direction of its growth. A wrong decision can prove disastrous for the continued survival of the firm.

    2.Growth :

    A firm’s decision to invest in long terms assets has a decisive influence on the rate and direction of its growth. A wrong decision can prove disastrous for the continued survival of the firm. 

    3.Facing competition :

    The production process changed due to technological changes to sustain in the

    competition. producing expected and standard production by the means

    of capital budgeting the competition may be faced effectively. 

    4.Capacity of probability :

    the proper investment decision is undertaken to maintain the capacity of probability. 


    A long-term commitment of funds may also change the risk complexity of the firm. If the adoption of investment increases average gain but causes frequent fluctuations in

    its earnings, the firm will become riskier. Thus investment decisions shape the basic character of a firm. 

    6.Uncertainty :

    make investment decisions effective, knowledge of future uncertain factors is kept immensely. 

    7.Longevity of fixed assets :

    Capital budgeting can evaluate the longevity of fixed assets properly. 

    8.Huge capital investment :

    Capital budgeting long terms investment decisions and needed huge funds. For any

    wrong decision, a firm may suffer a huge loss, thus capital budgeting is very important in financial management. 

    9.Irreversibility :

    Most investment decisions were irreversible. difficult to find a market for capital items once they have been acquired. The firm will incur heavy losses assets scrapped. 

    10.Complexity :

    An investment decision is the most difficult decision. It is complex to predict future

    events. It is eventually a difficult problem to correctly estimate the future cash flows

    of an investment. Economic, political, social, and technological forces cause

    uncertainty in cash flows estimation. Features of capital budgeting are the decision

    for long-term planning for the investment in projects. The nature or features of

    capital budgeting discussed below :

    1. Long-term plan: even the budget itself planned. Here capital budgeting is a

    long-term plan. Because the plan was undertaken for long-term fixed assets. 

    2. Huge investment: Capital budgeting is related to capital investment because a

    firm needs huge funds to procure fixed assets. 

    3. Much Risk: Risk is higher in this type of planning. Although the future is

    uncertain, the risk to invest in huge funds is taken.

    4. Regular cash flow: Regular cash flow expected capital budgeting. Cash will

    regularly flow till the longevity of the assets.

    5. Long-term benefit: capital budgeting undertaken for the long-term benefit

    . Because it is natural to get long-term benefits from the long-term plan.

    6. Time value of money: considered capital budgeting. For making a financial

    decision, the time value of money is significantly considered. A firm normally

    operates to maximize its profit in the long run. To implement this goal, it is necessary to select the project which will maximize profit at a lower cost. In this

    situation, capital budgeting is fruitful to evaluate the projects and choose the best one. A firm prepared a capital budget to make changes in its production system.

    Because it has to procure different types of equipment and machinery for different

    production systems. Comparing the future expected cash inflows with the

    investment, capital budgeting can help in selecting rational projects. the firm

    prepares a capital budget due to increase its production level. machinery is to be procured to increase production level. Capital budgeting is applicable to make the balance in the long term investment. 

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