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Your manager has told you that capital budgeting is a waste of time. How would you...

Your manager has told you that capital budgeting is a waste of time. How would you respond to your manager? Include a discussion of the screening decision calculations available for use in making the appropriate decisions.

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Answer #1

Capital budgeting allows the comparison of the cost (investment) in a project and the cash flows generated by the same project. If the value of the future cash flows exceeds the cost or investment, then there is potential for value creation because of the positive inflows over outflows.

Ideally, businesses would pursue any and all projects and opportunities that enhance shareholder value. However, because the amount of capital any business has available for new projects is limited, management uses capital budgeting techniques to determine which projects will yield the best return over an applicable period.

Hence capital budgeting techniques is required when the resources are limited and there are a lot of options and sometimes which are mutually exclusive and a wrong decision on part of management can have adverse impact on the functioning of a company.

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