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