"A capital budgeting decision is capable of changing the financial fortunes of a business." Do you agree? Give reasons for your answer?
Answers
SOLUTION :
Yes, I agree that a capital budgeting decision is capable of changing the financial fortune of a business.
The following points highlight how capital budgeting decision affect the finance fortune of a business :
(a) LONG TERM EFFECT :
Capital expenditure decisions affect future cost of capital structure and decide the future fate of the enterprise. The funds invested in fixed assets yield benefits in the long run.
(b) LARGE AMOUNT OF FUNDS NEEDED :
These assets involve large amount of funds which remain blocked in the business for a long period of time. A very careful analysis is done about likely benefits and financial commitment towards the lenders before raising the funds.
(c) RISK INVOLVED :
As the funds are blocked in the assets for a longer period of time, the gestation period is quite long.
If adequate benefits and not reaped in reasonable time, they may affect the fortune of a business.
(d) IRREVERSIBLE DECISIONS :
Once the decisions to invest funds in the fixed assets are taken there is no likely chances for their reversal. If in any case, it is done so, the problem of survival may emerge. So crucial analysis is absolutely necessary before investing the funds.
Hence, bad capital budgeting decisions severely damage the financial fortunes of a business.
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Answer:
Explanation:
Once the decisions to invest funds in the fixed assets are taken there is no likely chances for their reversal. If in any case, it is done so, the problem of survival may emerge. So crucial analysis is absolutely necessary before investing the funds.
Hence, bad capital budgeting decisions severely damage the financial fortunes of a business.