Question

Explain the difficulties faced in capital budgeting decision

Answer 1

1. Demand for capital:

The starting point for capital budgeting is a survey of the need of capital for the company. The discovery and development of good investment proposals require efforts and as such an imaginative search for such opportunities is very important part of the programme.

2. Supply of capital:

This is a problem to find out where from the money will came. The distinction between internal and external sources of funds must be made.2. Supply of capital:

3. Capital rationing:

Capital is a scarce resource and is therefore, it has a cost. The return on investment must be more than the cost of capital.

Only that investment should be considered for acceptance which yields a rate of return in excess of cost of capital.