Chapter 25, Problem 1DQ

To determine

Introduction:

Capital Budgeting Decision: The most vital and crucial financial decision taken by the managers in relation to the investment in capital expenditures refers to capital budgeting decision. It is the commitment of resources in the business with the aim to recoup the benefits over a long time period in the future. The management should take correct decision at appropriate time to generate good returns on investment that ensures the success of the business.

To state:

The reason why the capital budgeting decisions require careful analysis by the management.

Answer to Problem 1DQ

Solution:

Capital budgeting decisions require careful analysis because they are generally the most difficult and risky decisions that management faces.

Explanation of Solution

The capital budgeting decision requires careful analysis and diligent planning because of the following factors:

a. Capital budgeting deals with huge capital outlay with scarce resource.

b. It has long term effects by which the returns from capital expenditure accrues over the life period of the project.

c. It deals with the future period which is always uncertain to be predicted.

d. Decision taken in capital budgeting are irrecoverable in future at any cost.

Conclusion

The survival of the business and success of the project depends largely on capital budgeting decisions that forces managers to take appropriate decisions.