| The Capital Budgeting decisions generally | | | | the future destiny of a firm.Capital |
| involve very large amount of capital funds. | | | | expenditure decisions are irreversible in |
| However, the availability of such funds is | | | | nature. Once the decision to commit long-term |
| very limited. It is therefore, essential that | | | | funds is made, especially on the acquisition |
| thoughtful and wise decisions are made | | | | of assets, it would prove suicidal to go back |
| concerning such investment of capital funds. | | | | on such a decision. This is because such |
| This alone would result in flow of profits | | | | assets, once required, could not be disposed |
| for the firm.Capital Budgeting involves the | | | | off without incurring huge losses. Hence, |
| employment of capital funds in the activities | | | | capital expenditure decisions are considered |
| of the firm on a long-term basis. This | | | | significant.Capital expenditure decisions |
| increases the financial risk involved in such | | | | have a long-term and significant impact on |
| investment decisions. This necessitates the | | | | the profit-earning capacity of a firm. This |
| careful and efficient planning of capital | | | | is because, as funds are committed in assets, |
| expenditure. This is because any wrong and | | | | they not only improve the current earnings, |
| unwise decision may prove disastrous for the | | | | but also significantly contribute to the |
| firm.Such a decision leads to unwanted | | | | overall and long-term profitability of the |
| expansion of assets, which may result in | | | | firm. Any unwise and thoughtless decision may |
| heavy operating costs to the firm. On the | | | | prove to be fatal to the very existence and |
| other hand, inadequate and untimely decisions | | | | survival of the firm. Hence, Capital |
| may plunge the company into a financial | | | | Budgeting decisions are of vital importance. |
| morass. This may weaken the competitive | | | | Such decisions could guard against both over- |
| strength of the firm. Thus, it is clear from | | | | investment and under- investment in fixed |
| the above that capital decisions determine | | | | assets. |