Importance Of Capital Budgeting

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The main goal of business is to increase shareholders’ profit. To enhance shareholder value a business should follow all the opportunities. To utilize the limited capital in order to increase profit in business capital budgeting techniques is required. Capital budgeting is a long term asset management. According to the definition “The process of analyzing alternative long-term investments and deciding which assets to acquire or sell”. Capital budgeting is an important aspect for the company’s growth and productivity. To avoid company to financial problems capital budgeting is very important. To maximize the value of the company in the future capital budgeting techniques is important. According to Peterson [1] to correctly implement the capital budgeting techniques, following should be required. • Its future cash flow • The degree of uncertainty associated with these future cash flows • The value of these future cash flows considering their uncertainty. Capital budgeting decisions are difficult because they require predicting events that has not occurred yet. It is risky because the outcome is uncertain, large amount of money are involved, there is a long term commitment in an investment. Managers uses several methods to evaluate capital budgeting. One of them is the time value of money. According to the Time Value of Money (TVM), it is stated that “a dollar today is worth more than a dollar a year from now and vice versa. Therefore, projects that promise earlier returns are preferable to those that promise later returns. The capital budgeting techniques that best recognize the time value of money are those that involve discounted cash flow. There are variety of methods and techniques that a business can use to facilitate capita... ... middle of paper ... ...siness both small and large sized manufacturing business. Any business that invest in any kind of project without understanding the risks and returns involved will results loss of capital and no chance of surviving in the competitive marketplace. Capital budgeting decisions helps to make two important decisions, a financial decision and an investment decision. To develop and formulate long- term strategic goal capital budgeting is much necessary. A capital budgeting process also help to create a set of decision rules that can help the mangers to know how to categorize which project is acceptable and which are not. For capital budgeting decision making the size of the business, level of education, process of capital budgeting are all considered. Even though payback method has lots of disadvantage in capital budgeting process it still remains popular and easier.
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