Importance of Capital Budgeting

Importance of Capital Budgeting

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Introduction

In the business world, capital budgeting is among the most important steps that a firm can take before investing in any investment project to avoid making fatal mistakes. Additionaly, it helps predict the future and thus it should be utilized before any investing in any new project.

Current and future importance of capital budgeting

Identifying Opportunities

Entrepreneurs or business owners are usually presented with different potential investment opportunities and thus the need to establish which opportunity is most viable at the time (R. A. F. 1988). Capital budgeting is ideal in identifying whether the required resources are available and what risks expecting using the capital budgeting methods.

Assess Opportunities

Once the potential opportunities are identified they are assessed independently to find out whether they match with the business strategic plan, vision and mission statement (Kim, 1980).Additionally the entrepreneur finds the necessary resource for the investment project through a budget plan.

Cash Flow Assessment

The entrepreneur need to come up with a cash flow plan based on the present value of the project .For instance, capital budgeting find the amount of cash required to complete and maintain the project after completion done through expert consultation. Secondly, the assessment involves determining the expected returns of the project that helps determine whether the project