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Introduction: Capital Budgeting Decisions
Capital budgeting decisions pertains to fixed assets. This involves a current outlay or series of outlays of cash resources in return for an anticipated flow of future benefits. This system is employed to evaluate an expenditure decision, which involves current outlays but is likely to produce benefits over a period of time longer than one year. These benefits may be either in the form of increased revenues or reductions in costs.
Capital budgeting decisions are of paramount importance in financial decision-making. These decisions affect the profitability of a firm. They also have a bearing on the competitive position of the enterprise. An opportune investment decision can yield spectular returns. On the other hand, an ill-advised and incorrect investment decision can endanger the very survival even of the large sized firms.
Hence capital expenditure decisions are of considerable significance to the firm as the future success and growth of the firm depends heavily on them. But they are not easy to take as the benefits from investments are received in some future period and future is uncertain. Therefore an element of risk is involved. Capital budgeting decision involves two steps first, determination of relevant cash flows and second evaluation of cash flows.