In the modern world, there are immense importance of capital budgeting. If it is small or are entry capital budgeting helps business to reach its desired goal. So, understand the importance of capital budgeting there are some importance given below:
1. Huge Investments: Capital budgeting requires huge investments of funds, but the available funds ate limited, therefore in the investment decision are more. If higher risk are involved, it needs careful planning of capital budgeting.
2. Long-term: Capital expenditure is long term in nature or permanent in nature. Therefore financial risk involved in the investment decision is more. If higher risks are involved, it needs careful planning of capital budgeting.
3. Irreversible: The capital investment decisions are irreversible are not changed back. Once the decision is taken for purchasing a permanent asset, it is very difficult to dispose off those assets without involving huge losses.
4. Long-term effect: Capital budgeting not only reduces the but also increases the revenue in long term and will bring significant changes in the profit of the company by avoiding over or more investment or under investment. Over investments leads to be unable to utilize assets or over utilization of fixed assets.
5. Future of the firm: In which course of action will be followed by the firm is defined by capital structure.
6. Competitiveness: Sound capital budgeting help the firm to make it competitive with other firm and in some extent grab the finance opportunity from the market.
7. Global financing: If the firm existing in the market in a good period of time it can plan its finance from the global market.
8. Cost effective: Capital budgeting helps to reduce cost and make the whole financing decision cost effective. In the conclusion remark we find capital budgeting a tool of competent management which helps to manage finance for a period of time.
Need and Importance of Capital Budgeting
