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Capital budgeting refers to decisions regarding investment in fixed assets (Wood & Sangster, 2015). A significant hypothesis while learning decision pertaining to capital budgeting is that investment in capital assets signifies long-term commitment (Atrill & McLaney, 2017). This means that money is blocked for long periods and no returns are expected from such investments over the short-term. The decisions in capital budgeting can affect the productivity and expansion of an organization. Moreover, capital budgeting model classically presumes the core objective of an organization’s investors is to maximize business value. Therefore, all investments should be directed at ventures that are aimed at maximizing business value. When these presumptions are attained, organizations can separate financing decisions and investment. Consequently, they can venture into all positive net present value outlays (Wood & Sangster, 2015).
However, there are several limitations to the aforementioned capital budgeting assumptions. Foremost, the return of an outlay cannot be the only criteria for making a specific investment. Venture proposals that bring higher rate of return are often occasioned by massive risks. Moreover, investor’s value maximization might not be the aim of each small organization (Atrill & McLaney, 2017). This is because the proprietor can establish a business as a substitute for unemployment, as a method to avoid employment monotony or as a vehicle to manufacture, develop and develop inventions. Moreover, numerous small organizations have inadequate management resources and lack skilled labor in accounting and finance. Because of these situations, they might not access the projects using the discounted cash flows (Wood & Sangster, 2015). Finance managers should select outlays with reasonable risks, which the organization can simply afford. Hefty risks may lead to liquidation of the organization in the end (Wood & Sangster, 2015).
References
Atrill, P. and McLaney, E. (2017). Accounting and finance for non-specialists. 10th ed. Harlow: Pearson Education Limited.
Wood, F. and Sangster, A. (2015). Business accounting 1. 13th ed. Harlow: Pearson Education Limited.
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