Capital Budgeting - Need For Capital Budgeting

Need For Capital Budgeting

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The investment becomes sunk and mistakes, rather than being readily rectified,must often be born until the firm can be withdrawn through depreciation charges or liquidation.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.