The importance of capital
budgeting for taking! investment decision:
1.As large sum of money is
involved which influences the profitability of the firm making capital budgeting an important task.
2.Long term investment once made
can not be reversed without significance loss of invested capital. The investment becomes sunk and
mistakes, rather than being readily rectified,must often be born until the firm can be withdrawn
through depreciation
charges or liquidation. It influences the whole conduct of the business for the years to come.
3.Investment decision are the
base on which the profit will be earned and probably measured through the
return on the capital. A proper mix of capital investment is quite important to ensure
adequate rate of return on investment, calling for the need of capital budgeting.
4. The implication of long term
investment decisions are more extensive than those of short run decisions because of
time factor involved, capital budgeting decisions are subject to the higher degree of
risk and uncertainty than short run decision.