Why do we need proper decision on investment ?
As successful operation of any business depends on the investment of resources in such a way as to bring in best possible returns for that proper decision making is important.
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Capital budgeting decisions may also be needed for the following
- Expansion : Any firm requires additional funds for investment in assets ( fixed) when it tends to to expand the production facilities in view of the increase in future demands.
Replacement : Replacement of machines takes place due to obsoletion and wear out so in that case funds is required for replacement .
Diversification : The process of diversification needs funds for long-term investment .
Research and Development : Production and operations can be improved by the application of new production techniques . Greater funds are required for continuous research for which proper decision is required.
Significance of Capital Budgeting
Capital budgeting decisions are crucial so it should be taken carefully.
Long-run decisions are implicated so proper decision is required as wrong decision may have negative effects on business.
Rigidity is necessary because once funds are committed in a project , they are continued till the end . Loss or profit are kept aside.