'A Capital budgeting decision is capable of changing the financial fortunes of a business.' Do you agree? Give reasons for your answer?

Or

Explain by giving any four reasons, why capital budgeting decisions are important.

Yes, we agree with the statement. These decisions are more important because of the following reasons:

(i) Long-term Growth and Effect: These decisions are concerned with long-term assets. These assets are helpful in production. Profit is earned by selling the goods so produced. It can, therefore, be said more correct these decisions are, greater will be the growth of business in the long run. In addition to that, these decisions affect future possibilities of the business.

(ii) Large Amount of Funds Involved: Decisions regarding fixed assets are included in the preview of capital budgeting. Large amount of capital is invested in these assets. If these decisions turn out to be wrong, there occurs heavy loss of capital which is a scarce means,

(iii) Risk Involved: Capital budgeting decisions are full of risk. There are two reasons for it. First, these decisions refer to a long-period, as such expected profits for several years are to be anticipated. These estimates may turn out to be wrong. Second, because of heavy investment involved, it is very difficult to change the decision once taken.

(iv) Irreversible Decisions: Nature of these decisions is such that it cannot be changed so quickly. For instance, if soon after setting-up a cotton mill, it is thought of changing it, then the old machinery and other fixed assets will have to be sold at down price. In doing so, heavy loss will have to be incurred. Changing of these decisions is, therefore, very difficult.