In this article, we will talk about the Meaning, Need and Importance of Capital Budgeting Decisions.
Firstly, We will talk about the Meaning of Capital Budgeting.
Capital Budgeting is the long-term investment decision in which the firm invest the large amount of money for a long period of time which includes more risk as well as the more profitability for no. of years.
Importance of Capital Budgeting
- Large Investment- The First Need and Importance of Capital Budgeting is that it includes the large investment. In this, a large amount of money is invested to get good returns.
- Long-term Commitment of Funds- Capital Budgeting is for the long term nature or permanent in nature. In this, the funds are committed for the investment for no. of years which also includes more risk.
- Irreversible in Nature- The Decisions of Capital Budgeting Decisions are irreversible. If any Large Investment Decision is taken, it can’t be changed back without having any losses.
- Long-term Effect on Profitability in Capital Budgeting- The another Need and importance of Capital Budgeting is that it is also gives the long-term effect on the profitability. As there are more risks involved, a large amount of money involved. In the same way the profit is also have the long-term effect for the no. of years.
- Difficulties in Investment Decision- Capital Budgeting Decisions is very difficult and complicated exercise. This decision involves the complete analysis of the market about the future events. Any Wrong Decision can give you the huge risk.
- National Importance- The Selection of the Capital Budgeting Investment Decision improves the economic growth, employment opportunities and per capita income. This is how Capital Budgeting influences the National Importance.
- Maximize the worth of Equity Shareholders- The Worth of Equity Shareholders got increased by acquiring the fixed assets. A Proper Capital Budgeting involves the optimal investment instead of the over investment. The Management choose those investment projects which has more value and also includes more profit. This is how Capital Budgeting maximize the worth of Equity Shareholders.
- Involves More Risk- The Last but not least Importance of Capital Budgeting Decisions from my side is that it involves more risk. Management should take the decisions by studying all the future aspects because the future is uncertain. You just don’t have to think about the profit. Also think about the Loss if you take the wrong action because large investment gives more risk.
- Complications of Investment Decisions- Capital Budgeting Investment Decisions are more complicated in nature. Moreover, the purchase of fixed assets in Capital Budgeting is the continuous process. So, Management have to understand all the complexities in all the investment projects.
So, this was about the Need and Importance of Capital Budgeting Decisions in Financial Management. I hope You have liked this article. Check our Other Articles too.
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