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The Importance of Capital Budgeting

Here is an article to know about the importance of Capital Budgeting. Kindly refer to the document to know in detail.<br>

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The Importance of Capital Budgeting

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  1. The Importance of Capital Budgeting

  2. The blood of a business is 'capital'. Just like human body functions on blood, a business also functions on capital. When an organization has capital, it can reach great heights. However, the capital has to be planned and used well. If the capital is not invested smartly it would lead to huge disasters for the organization. A business house thus invests smartly in different options like venture capital, mutual funds, etc besides investing in different projects. Investing in mutual funds or shares, is only partially in control of the entrepreneur. However, the entrepreneur has complete control over one decision - deciding the projects one wishes to invest in.

  3. Every business organization works on different projects. This diversifies the risk. Working with only one client or only one project poses high risk for the organization because the functioning of the entire organization depends on this single project. Thus, choosing different projects is essential for the organization. Again choosing the right projects that is budgeting the capital the organization has is essential. This smart investment of the capital of the organization is known as Capital budgeting. In other words, the analysis of the firm's decision of investment is known as Capital budgeting. Investment of the organization in big projects, is a very important decision because these investments are usually for long term and cannot be reversed easily. The capital thus gets stuck in these projects for long and might lead to a negative results for the organization. Thus, the management of the organization uses capital budgeting techniques to determine and choose which of the projects is more feasible and profitable for the organization.

  4. Why is this decision critical?The capital available with an organization is limited. This is true in case of capital raised through debt or equity. There is a constraint of capital rationing in the organizations. Thus, the investments have to be planned and there are many factors that help in taking this decision. These factors are:· Capital to be invested· Rate of return· Expected profit· Duration of investment, etcThus, the management has to be very careful in deciding whether a particular project would be actually beneficial for the organization. Besides, deciding which of the two given projects is important is also very important.

  5. There are a few techniques that help the management in capital budgeting and deciding on various venture cpital projects or other investments. These techniques are: Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index (PI) Payback Period (PP) The management usually analyzes every project using all these for techniques and the one which gets the maximum positive results from all these techniques is considered the best project.

  6. Contact Us: 116, B.U. Bhavan, SewreeMumbai, 400015 Mail us at begin@getvantage.co or call +91 882 855 3434 Kindly connect GetVantage at the below link https://www.getvantage.co/

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