Capital Budgeting Decisions and its Importance

Question No.2. (a) What is capital budgeting decision? Why is it significant for a firm?

Solution: The term capital budgeting refers to expenditure on capital assets. No business can be performed without creating some assets and only through these assets the process of production can take place, i.e. the inputs can be converted into outputs.

Spending money on capital assets is a very important decision that a finance manager is required to make. Capital investment expenditure may be on Plant, Machinery Equipment, Land, Buildings, Roads, and Bridges etc. Although spending money on anything is important and prudence must be exercised in all such matters, but spending money on capital assets is especially more important and the finance manager is, therefore, required to be much more cautious in making such a decision, for the following reasons;  

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