Capital budgeting also referred to as Investment Appraisal can be defined as a step by step process that businesses use to determine the merits of an investment project. Capital budgeting helps a business to see into the future and figure out the profitability of a long-term investment. The decision to whether accept or reject an investment project involves determining the investment rate of return that such a project will generate. However, what rate of return is deemed acceptable or unacceptable is influenced by other factors as well that are specific to the company as well as the project (Thompson,2018).
Capital budgeting is important because it creates accountability and measurability both at the same time. It is a measurable way for businesses to determine the long-term economic and financial profitability of any investment project. If any Company decides to invest in a project without understanding the risks and returns involved in it, it would be held as irresponsible by its owners or shareholders. The Capital Budgeting is also important to a Company as it creates a structured step by step process that enables a company to 1) Develop and formulate its long-term strategic goals to plan out its future long-term direction. 2) Find out which new investment projects it could undertake to compete against its rivals and make profits. 3) Estimate its future cash flows it would be able to achieve. 4) Monitoring and making efforts to control its Expenditure. 5) Make a quick decision to accept or reject a project (Wilkinson, 2013).
The more competitive a company wants to be, the more precisely it must capitalize on investment opportunities, and do so with extremely minimal margins of error (Quantumfbi. 2017). Therefore, it could be clearly seen that unlike other business decisions that involve only a singular aspect of a business, a capital budgeting decision involves two most important decisions at the same time such as financial decisions and investment decisions. In addition to a financial decision taken by the company it is also making an investment in its future direction and growth that will likely to have an influence on future projects that the company considers and evaluates. So it can be rightly said that capital budgeting process is the most important process that a firm undertakes because it has a major impact on which project or business a company chooses as it facilitates the appraisal and selection of the most viable investments which is so vital for the growth of the firm and the various stakeholders associated with it.
Quantumfbi, (2017). The Importance of Capital Budgeting. Retrieved from: www. https://quantumfbi.com
Thompson, J., (2018). What Is Capital Budgeting and Why Is It Important? Retrieved from: www.bizfluent.com
Wilkinson, J., (2013). Capital Budgeting Methods. Retrieve
