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Considering the amount of uncertainty and risk involved in capital budgeting, what is the point of...

Considering the amount of uncertainty and risk involved in capital budgeting, what is the point of applying any of the 4 analysis techniques to these decisions?

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Answer #1

Future is always full of risks and uncertainities but capital budgeting is the attempt to determine the future in best possible way with the techniques available. e.g. weather department cannot predict with 100% possibility that if it's going to be rain or not but it can tell you the probability and it can help in planning if we need to carry umbrella, raincoat or not to mitigate the inconvenience.

Capital budgeting helps in exposing the risk and uncertainty of different options. Ultimately the fortune of a business is decided on how optimally the available resources are used.

Capital expenditures are long term investments which involve huge financial risks and that is why proper planning through capital budgeting is needed.

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