Importance of Capital Budgeting Research Essay

Capital Budgeting
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Capital Budgeting
Introduction
Capital budgeting can be described as the decision-making process relating to long-term capital investment programs. It can involve purchasing fixed assets, such as new machinery or acquiring a piece of land. Investors determine the value of the potential project through the capital budgeting process. Capital budgeting is critically important when making investment decisions that influence the risk factor associated with a particular investment project. A commitment of vast amounts of funds, future events assessment, and selecting the appropriate source of finance for a certain period also involves capital budgeting (Burgos et al., 2020). Capital budgeting facilitates measurability and accountability, which are important aspects of investing in a new project. Furthermore, any business that seeks to invest its resources in a particular project without analyzing the expected returns and the risks involved would be termed irresponsible by its shareholders and potential investors.
Importance of Capital Budgeting Research
Capital budgeting is an essential tool of financial management that will provide a means for measuring and evaluating the value of the project throughout the project's life. First, capital budgeting research is important in assessing and ranking investments that require a huge amount of capital investment to determine whether or not such projects are worth allocating funds to. Secondly, the company's financial decision-makers depend on capital budgeting research findings to help them make informed financial decisions on projects, especially for long-term projects (Abor, 2017). These projects may include; research and development related to a new product, workforce expansion, investments in new technology, buildings, and new equipment. This research topic will also be important in understanding how companies create project budget costs, estimate the return on investment timeline, and determine whether the capital investment is worth the project's potential value.
Purpose of Research
The primary purpose of this research is to understand how capital budgeting impacts the growth and prosperity of businesses in the long term.
Literature Review
Due to the risk factor associated with the huge investments, capital budgeting becomes crucial in influencing the financial decisions taken by the management. Companies can be committed to major causes of action due to capital investments. Since the capital investment outlays tend to be large, slow to materialize, and uncertain, they can be risky and difficult to reverse once implemented. Typical investment decisions such as mergers and acquisitions of companies, new product lines, and research and development have similar characteristics. They involve substantial initial capital outlays, benefits, the lay basis for the company's future success, and impact on its long-term performance. Before companies undertake capital budgeting decisions, management accountants should provide advice based on analysis from various sources (Sarwary, 2019). The investment decision should not be biased and should be collected from diff...