- Books Name
- BUSINESS STUDIES-XII
- Publication
- ABCD CLASSES
- Course
- CBSE Class 12
- Subject
- Business Studies
INVESTMENT DECISIONS:
- Involves decision regarding short term (working capital) required for operational and day-to-day activities
- Long-term (capital budgeting) investment in assets requires funds for the setting of new projects or expansion and modernization.
Capital budgeting:
Refers to investment in long-term assets e.g. plant and machinery, furniture and fixture, land and building, expenditure on acquisition, expansion, modernization.
- Capital budgeting affects the growth, and profitability of the business in the long run.
- Must be financed through long-term sources of capital such as equity debentures, and long-term loans.
Why capital budgeting decision is considered a risky decision?
Capital budgeting decisions are important for the following reasons:
- Funds involved are large:
- Involves a large portion of funds
- Requires a lot of financial planning
- Irreversible decisions:
- Decisions once taken are not reversible without incurring heavy losses.
- Cancellation of a project is quite costly in terms of waste of funds.
- Returns/profits come in long run:
- The fixed assets are invested for the long term and earnings come after a long duration.
- It is difficult to measure the benefits as the future is uncertain due to political, legal, and technological changes.
- Effects on Long-term growth and profitability:
- The direction of growth depends on capital expenditure.
- If the decision goes in the right direction profitability increases.
- If goes wrong, it is harmful to growth and profitability.
Factors affecting capital budgeting decisions:
- Rate of return:-
- Expected rate of returns from each proposal should be compared with the risks associated with the projects before taking an investment decision.
- E.g If there are two investment proposals A and B with a rate of return of 10% and 12%, the project B should be selected.
- Investment criteria involved:
- All projects are to be considered based on the amount of investment, interest rate, cash flows and rate of return
- Ranking the projects, according to their profitability by using various capital budgeting techniques like;-Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period
- Cash Flows Of The Project:
- Cash is likely to generate when invest in fixed assets
- Company must analyze the duration in which the cash is likely to generate
- Projects like hydro-power, telecom longer time
- Eatables generate quick cash