AIM OF CAPITAL BUDGETING - Accounts and Finance for Managers

To make rational investment: The study of capital budgeting on capital expenditures evades not only over capitalization but also under capitalization. The long-term investment normally demands heavy volume of investment which is met out by the firm either through external or internal source of financing. Hence, the amount of capital raised by the firm should neither greater nor lesser than the investment.

Locking up of capital: The amount invested is requiring longer gestation to recover. The longer gestation is connected with future horizon in getting back the investment. The future is uncertain unlike the present. If the longer is the gestation in the future leads to greater risk involved.

Effect on the profitability of the enterprise: The profitability of the enterprise is mainly depending on the proper planning of the capital expenditure.

Nature of Irreversibility: The improper/ unwise capital expenditure decision cannot be immediately corrected as soon as it was found. Once it is invested is invested which cannot be reversed. The poor investment decision will require the firm either to keep it as an idle in the form of investment or to unnecessarily meet out fixed commitment charge of the capital which excessively raised more than the requirement.

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