Advantage and disadvantage of Capital budgeting.

Advantages of Capital Budgeting:
1.Capital budgeting helps a company to understand various risks involved in an investment opportunity and how these risks affect the returns of company.
2.It helps the company to estimate which investment option would yield the best possible return.
3.A company can choose a technique/method from various techniques of capital budgeting to estimate whether it is financially beneficial to take on a project or not.
4.It helps the company to make long term strategic investments.
5.It helps to make an informed decision about an investment taking into consideration all possible options.
6.It helps a company in a competitive market to choose its investments wisely.
7.All the techniques/methods of capital budgeting try to increase shareholders wealth and give the company an edge in the market.
8.Capital budgeting presents whether an investment would increase the company’s value or not.
It offers adequate control on expenditure for projects.
9.Also, it allows management to abstain from over investing and under investing.

Disadvantages of Capital Budgeting:
1.Capital budgeting decisions are for long term and are majorly irreversible in nature.
2.Most of the times, these techniques are based upon the estimations and assumptions as the future would always remain uncertain.
3.Capital budgeting still remains introspective as the risk factor and the discounting factor remains subjective to the manager’s perception.
4.A wrong capital budgeting decision taken can affect the long term durability of the company and hence it needs to be done judiciously by professionals who understands the project well.

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