Table of Contents
- 1 Meaning of Capital Budgeting
- 2 Table of Contents
- 3 Definition of Capital Budgeting
- 4 Importance of Capital Budgeting
- 5 FAQs about the Importance of Capital Budgeting
Meaning of Capital Budgeting
Capital Budgeting is the process of making investment decisions in capital expenditure. It involves the planning and control of capital expenditure. It is the process of deciding whether or not to commit resources to particular long-term projects whose benefits are to be realized over a period of time.
Definition of Capital Budgeting
Importance of Capital Budgeting
These are the importance of capital budgeting as follows:
- Large Investment
- Long-Term Commitment of Funds
- Irreversible Nature
- Long-term Effect on Profitability
- Difficulties of Investment Decisions
Capital budgeting decision involves a large investment of funds. But the funds available with the firm are always limited and the demand for funds far exceeds the resources. Hence it is very important for a firm to plan and control its capital expenditure.
Long-Term Commitment of Funds
Capital expenditures involve not only a large amount of funds but also funds for a long-term or permanent basis. The long-term commitments of funds increase, and the financial risk is involved in the investment decision. The greater the risk involved, the greater is need for careful planning of capital expenditure i.e. Capital Budgeting.
The Capital expenditure decision is of irreversible nature. Once the decision for acquiring a permanent asset is taken, it becomes very difficult to dispose of these assets without incurring heavy losses.
Long-term Effect on Profitability
Capital budgeting decisions have a long-term and significant effect on the profitability of a concern. Not only the present earnings of the firm are affected by the investments in capital assets but also the future growth and profitability of the firm depend upon the investment decision taken today. An unwise decision may prove disastrous and fatal to the very existence of the concern.
Difficulties of Investment Decisions
The long-term investment decision is difficult to be taken because the decision extends to a series of years beyond the current accounting period, uncertainties of the future, and a higher degree of risk. 6. National Importance: Investment decision though taken by individual concern is of national importance because it determines employment, economic activities, and growth.
FAQs about the Importance of Capital Budgeting
What is the importance of capital budgeting?
The importance of capital budgeting is:
1. Large Investment
2. Long-Term Commitment of Funds
3. Irreversible Nature
4. Long-term Effect on Profitability
5. Difficulties of Investment Decisions.