- 2079 Baisakh
Define capital budgeting and its importance
Short answer
Capital budgeting is evaluating and selecting long-term investment projects by comparing cash outlay with future returns. It is vital because large funds are committed irreversibly, affecting a firm's growth, risk and cost of capital, and requires careful ranking of limited resources.
Define capital budgeting and its importance.
Definition
Capital budgeting is the process of planning, evaluating and selecting long-term investment projects whose benefits come over several years (such as a new plant, road or building), by comparing the cash outlay with the expected future returns.
Importance
- Large funds are committed for a long period.
- Decisions are irreversible; a wrong decision may cause heavy loss.
- It decides the future growth and profit of the firm.
- It affects the firm's risk and its cost of capital.
- Funds are limited, so projects have to be ranked.
- It needs a long-term forecast of demand, cost and technology.
Examples of capital budgeting decisions are building a new hydropower plant, buying a crusher plant, replacing old equipment and expanding a factory.
✓ Answer checked by Claude Opus 5.5 (high effort)
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