Limitations of Capital Budgeting Although capital budgeting provides a lot of insight into the future prospects of a ousiness, it cannot be termed a flawless method after all. In this section, we learn about some of the limitations of capital budgeting. LIMITATIONS OF CAPITAL BUDGETING Cash Flows Time Horizon Time Value Discount Rates
Limitations of Capital Budgeting Although capital budgeting provides a lot of insight into the future prospects of a ousiness, it cannot be termed a flawless method after all. In this section, we learn about some of the limitations of capital budgeting. LIMITATIONS OF CAPITAL BUDGETING Cash Flows Time Horizon Time Value Discount Rates
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Transcribed Image Text:Limitations of Capital Budgeting
Although capital budgeting provides a lot of insight into the future prospects of a
business, it cannot be termed a flawless method after all. In this section, we learn
about some of the limitations of capital budgeting.
LIMITATIONS OF CAPITAL BUDGETING
Cash Flows
Time Horizon
Time Value
Discount Rates
Transcribed Image Text:Cash Flow
It is a simple technique that determines if an enhanced value of a project justifies the
required investment. The primary reason to implement capital budgeting is to
achieve forecasting revenue a project may possibly generate. The problem could be
the estimate itself. All the upfront costs or the future revenue are all only estimates at
this point. An overestimation or an underestimation could ultimately be detrimental to
the performance of the business.
Time Horizon
Usually, capital budgeting as a process works across for long spans of years. While
the shorter duration forecasts may be estimated, the longer ones are bound to be
miscalculated. Therefore, an expanded time horizon could be a potential problem
while computing figures with capital budgeting.
Besides, there could be additional factors such as competition or legal or
technological innovations that could be problematic.
Time Value
The payback period method of capital budgeting holds a lot of relevance, especially
for small businesses. It is a simple method that only requires the business to repay in
the predecided timeframe. However, the problem it poses is that it does not count in
the time value of money. This is to say that equal amounts (of money) have different
values at different points in time.
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