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    Importance and Difficulties of Capital Expenditure

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    Das Randhir
    Capital expenditure decisions are among the most important decisions a company can make. They have long-lasting effects, are difficult to reverse once made, and often involve substantial financial outlays. However, capital expenditures also pose difficulties in measurement, as costs and benefits can be hard to quantify and may extend far into the future. Uncertainty surrounding future conditions and the temporal spread of costs and benefits over many years further complicate capital expenditure decisions.

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    Importance and Difficulties of Capital Expenditure

    Uploaded by

    Das Randhir
    845 views1 page
    Capital expenditure decisions are among the most important decisions a company can make. They have long-lasting effects, are difficult to reverse once made, and often involve substantial financial outlays. However, capital expenditures also pose difficulties in measurement, as costs and benefits can be hard to quantify and may extend far into the future. Uncertainty surrounding future conditions and the temporal spread of costs and benefits over many years further complicate capital expenditure decisions.

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    Importance and difficulties of Capital expenditure

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    Capital expenditure decisions are among the most important decisions a company can make. They have long-lasting effects, are difficult to reverse once made, and often involve substantial financial outlays. However, capital expenditures also pose difficulties in measurement, as costs and benefits can be hard to quantify and may extend far into the future. Uncertainty surrounding future conditions and the temporal spread of costs and benefits over many years further complicate capital expenditure decisions.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    845 views1 page

    Importance and Difficulties of Capital Expenditure

    Uploaded by

    Das Randhir
    Capital expenditure decisions are among the most important decisions a company can make. They have long-lasting effects, are difficult to reverse once made, and often involve substantial financial outlays. However, capital expenditures also pose difficulties in measurement, as costs and benefits can be hard to quantify and may extend far into the future. Uncertainty surrounding future conditions and the temporal spread of costs and benefits over many years further complicate capital expenditure decisions.

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    Importance and difficulties of Capital

    expenditure
    Here you can understand about the importance and difficulties of Capital expenditure.
    Importance
    Capital expenditure decisions represent the most important decision taken by a
    company. Their importance from three inter – related reasons.
    1. Effects in the long Run: the consequences of capital expenditure decisions
    extend into the feature. The scope of current manufacture activities of a company
    governed largely by capital expenditures in the past. Likewise, current capital
    expenditure decisions provide the frame work for future activities. Capital investment
    decisions have an enormous bearing on the basic character of a company.
    2. Irreversibility: The market for used capital equipment in general is ill-organized.
    Further, for some types of capital equipment, custom-made to meet specific
    requirement, the market virtually be non-existent. Once such equipment is acquired,
    reversal of decision may mean scrapping the capital equipment. Thus, a wrong capital
    investment decision cannot be reversed without incurring a substantial loss.
    3. Substantial outlays: Capital expenditures usually involve substantial outlays. An
    integrated steel plant, for example, involves an outlay of several thousand millions.
    Capital costs tend to increase with advanced technology.

    Difficulties
    While capital expenditure decisions are extremely important, they also pose difficulties
    which supported from three principal sources:
    1. Measurement problems: Identifying and measuring the costs and benefits of a
    capital expenditure proposal tends to be difficult. This is more so when a capital
    expenditure has a bearing o some other activities of the company like cutting into sales
    of some existing product or has some intangible consequences like improving the
    morale of workers.
    2. Uncertainty: A capital expenditure decision involves costs and benefits that
    extend for into future. It is impossible to predict exactly what will happen in future.
    Hence, there is usually a great deal of uncertainty characterizing the costs and benefits
    of a capital expenditure decision.
    3. Temporal Spread: The costs and benefits associated with a capital expenditure
    decision are spread out over a long period of time, usually 10-20 years for industrial
    projects and 20-50 years for infrastructural projects. Such a temporal spread creates
    some problems in estimating discount rates and establishing equivalence.

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