Discuss in brief the concept of investment decision and why capital budgeting decisions are crucial in nature.
Investment decision involves careful selection of assets in which funds are to be invested. Decisions relating to investment in fixed assets are known as capital budgeting decisions, whereas, those concerning investment in current assets are called working capital decisions.
A business needs to invest funds for setting up a new business, for expansion and modernisation. The investment decision is taken after scrutiny of available alternatives in terms of costs involved and expected return.
These decisions are very crucial for any business. Earning capacity of the fixed assets of a firm, profitability, and competitiveness, all are affected by the capital budgeting decisions. Moreover, these decisions usually involve a huge amount of investment and are irreversible, except at a huge cost.