Question

define capital budgeting and explain why it is important to business and if the financial analysis should play a dominant role in capital budgeting decisions

Answer 1

Answer:

Definition of Capital Budgeting:

Capital Budgeting is the process of evaluating & finding long term investments that are in line with the investor's wealth creation.

Capital investment need heavy cash outflow & it is too important to evaluate the capital investment so that organization will able to achieve the future economic benefit for the growth of the company. Capital budgeting helps in selecting the proposal which provides the best return which is equal to or more than the investor's expectation.

Need for Capital budgeting for business:

1) Long term Impact: The capital budgeting decision has its effect over a long period of time, which impacts the growth of the business as well.

2) Substantially heavy Expenditure: Capital investment required substantially heavy expenditure hence it is very important for the organization to make a proper evaluation of the project as it involve huge expenditure & also decision once taken will not be reversible, hence capital budgeting technique play very vital role

3) Complex Decision: It invoice assessment of future events & which is very difficult to predict, hence capital budgeting techniques play a very vital role.

Accordingly, Capital budgeting play a dominant role in the business towards achievement of organization goals & also help in increasing wealth of investor's