Need and importance/Nature of Investment Decision

Need and importance/Nature

(1) Large investment

-   Involve large investment of funds

-   Fund available is limited and the demand for funds exceeds the existing resources

-   Important for firm to plan and control capital expenditure

(2) Long term commitment of funds

-         Involves not only large amount of fund but also long term on permanent basis.

-         It increases financial risk involved in investment decision.

-         Greater the risk greater the need for planning capital expenditure.

(3) Irreversible Nature

-   Capital expenditure decision are irreversible

-         Once decision for acquiring permanent asset is taken, it become very difficult to dispose of these assets without heavy losses.

(4) Long-term effect on profitability

-         Capital expenditure decision are long-term and have effect on profitability of a concern

-         Not only present earning but also the future growth and profitability of the firm depends on investment decision taken today

-         Capital budgeting is needed to avoid over investment or under investment in fixed assets.

(5) Difficulties of investment decision

-         Long term investment decision are difficult to take because (i) decision extends to a series of year beyond the current accounting period

-         (ii) uncertainties of future

-         (iii) higher degree of risk

(6) National importance

-         Investment decision taken by individual concern is of national importance because it determines employment, economic activities and economic growth.