Investment decision otherwise known as capital budgeting decision is perhaps the most important decision taken by a Finance Manager. Whatever is the objective of the firm, whether profit maximization or wealth maximization, capital budgeting decision affects performance of the firm decisively. These investment decisions have the following implications for the firm.
- They define the strategic focus and direction of the business. The capital expenditure made in new investments may result in entry into new products, services or new markets.
- Capital budgeting decisions require large funds and generally have long repayment periods. The results of capital budgeting continue to impact the finances of the firm for many years. Due to long project life, assessment involves number of years of future events leading to difficulty and uncertainty regarding the accuracy of assessment.
- Capital budgeting decisions are mostly irreversible. They involve investment in plant and machinery or new soft wares or technology etc. They are normally industry or user specific. If the project does not proceed ahead, it may be difficult to find buyers for the assets and the only alternative would be scar the assets at a huge loss.