Capital budgeting decision Understanding the Concept –
The investment decisions of afirm are generally known as the capital budgeting, or capital expendituredecisions. A Capital budgeting decision may be defined as the firm’s decisionto invest its current funds most efficiently in the long-term assets inanticipation of an expected flow of benefits over a series of years. The firm’sinvestment decisions would generally include expansion, acquisition,modernization and replacement of the long-term assets. Sale of a division orbusiness (divestment) is also analysed as an investment decision.
Importance- Investment decisions require special attentionbecause of the following reasons:
They influence the firm’s growth in the long run.
They affect the risk of the firm.
They involve commitment of large amount of funds.
They are irreversible, or reversible at substantial loss.
They are among the most difficult decisions to make.
Types of Investment Decisions – There are many ways toclassify investments. One Classification is as follows;
Expansion of existing business
Expansion of new business
Replacement and modernization