Types of Investment Decision

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Accept or Reject decision Ranking Of Alternative Investment Proposals Choice of mutually exclusive Project Expansion, Replacement and Diversification decision

Importance or Need For Capital Budgeting:

Capital budgeting involves long term commitment of funds in projects having reltively long gestation period and as such this investment takes the form of sunk costs. The investment, thus made can not be reversed except at a considarable loss to the firm. Besids, there is also the eliment of risk, and uncertainty. As such , there has tobe very carefull planning of investment project and this needs capital budgeting. The long term implcation of capital budgeetong decision, thus, make it quite important

large amount of funds have to be raised from the market at a cost for financing investment proposals. It is necessary, therefore, that earning s from this investment are adeque to cover the cost of borrowing. This requires careful study of the profitability of the of the project which calls for capital budgeting.

The firm should avoid high operating costs and idealness of capital equipment this essential to ensure adequate returen on investment. Accordingly, investment dicision Types of Investment Decisionital should be based on careful calculation through capital budgeting

Capital budgeting are important for the reputation the management as well. once capital investment are made, there is an expansion oof the capital base of the firm and it is supposed to earn an adequeate rate of return on the capital employeed and that is an important indicater of its acheivement. Aprudent capital budgeting dicision, thus, becomes very important for the management.

The impotant of capital budgeting, therefore, lise in the fact that without a prudent capital budgeting the policy the firm may find its self in a chaodic state of affairs. If long run capital inve stment are made on the bases hit and miss judgement and not on the consideration of the rate of return, the firm may be fect with the a losing project with low return at the cost for profitable ones.

Capital budgeting, thus, is a vital for the management because its brings home the fact that before making long term investment and commitment, the varous the alternative proposals should be examined, appraised an evaluated. As such capital budgeting has come to be regarded one of the key areas of managerial decision making.

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