Question

Your manager has told you that capital budgeting is a waste of time. How would you respond to your manager? Include a discussion of the screening decision calculations available for use in making the appropriate decisions.

Answer 1

i would like to tell my manager the advantages of capital budgeting . thses are -

1. cost - initial investment is substantial. therefore commitment of resources shoul be made properly.

2. time - effect of decision is only known in near future and not immediately. whereas cash outflows are to be made immediately.

3. risk - longer the time period of return , greater the risk is associated with cash flows. hence careful review of investment is necessary.

4.irreversebility - these decisions are irreversible . hence commitment should be made on proper evaluation

5. surplus - funds are obtained by firm at a certain cost like WACC . so there is a need to obtain a surplus over and above the cost of funds.

capital budeting is process of decision making while keeping in mind the above points with regard to investment in fixed assets.

therefore we can conclude that capital budgeting is not a waste of time