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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.
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