Need for Capital Budgeting
Capital budgeting is the process of evaluating and selecting long-term investments that are aligned with a company's strategic objectives. It is crucial for several reasons:
1. Strategic Investment Decisions: Capital budgeting helps businesses make informed decisions about investing in new projects or assets. By assessing the potential returns and risks associated with investment opportunities, firms can allocate resources effectively and pursue projects that promise the best long-term benefits. This ensures that investments are aligned with the company’s strategic goals and growth plans.
2. Financial Planning and Risk Management: Effective capital budgeting involves analyzing the financial viability of investments through techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period. This analysis helps in forecasting future cash flows, understanding the impact on the company’s financial position, and managing risks. It enables businesses to plan for funding requirements, avoid overextending financial resources, and mitigate potential financial risks associated with investments.
In summary, capital budgeting is essential for making strategic investment decisions and managing financial risks. It ensures that a company invests in projects that enhance value and support long-term growth objectives.
Subscribe on YouTube - NotesWorld
For PDF copy of Solved Assignment
Any University Assignment Solution
.webp)
