Question

the forecasting risks associated with capital budgeting is enormous. do you agree or disagree?

Answer 1

Capital budgeting is a financial analysis technique aimed at choosing an appropriate investment project by a company. This process involves choosing the right project to maximize the investors wealth by using various methods. It is primarily used for long term investment decisions and for fixed assets investments. Estimating risk forms an integral part of capital budgeting process and any misjudgement of risk can lead to the project being unsuccessful. Forecating risk for this process is tricky and involves consideration of multiple risk factors such as operational risks,financial risks,market risks. These risks may affect the project individually or the company as whole. Providing for mitigation of the risks is another important aspect of capital budgeting and the whole process can never be risk free. Hence, it can be concluded that forecasting risks associated with capital budgeting is indeed an enormous task.