Question

Discuss why capital budgeting decisions are the most important investment decisions made by a company’s management.

Answer 1

Answer:

Capital budgeting decisions holds a lot of importance for a company. Any business' proftability depends on the investments made by them so it becomes an important task for a company to evalutate different investment proposals and take decisions accordingly i.e. choose the proposal that will yield higher returns.
The investment decisions are meant for long term, therefore, capital budgeting decisions holds the future destiny of the company. Also, any investement made would require cash outflow so it becomes even more important for a company to make wise decisions because any wrong decision would result in losses for the company and prevent them from earning returns too.
The capital budgeting decisions require huge cash outflow therefore, it becomes difficult to rectify any mistake done at the time of making decision. It is important to evaluate the porposals correctly to avoid future heavy losses.
Investment in fixed assets helps in increasing the value for the equity shareholders therefore, a proper capital budget helps in wealth maximization for the company.
It can be concluded that operating a business is nothing more than a repetitive capital budgeting exercise. The company should be very particular in taking such decisions because it determine the profitability for the company, at the same time helps in creating value for the business and since it includes huge cash outflow, they should be taken wisely to avoid high monetary losses.