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FINANCIAL MANAGEMENTS 219 term basis. For example, making decisions) are concerned with the investment in a new machine to decisions about the levels of cash, replace an existing one or acquiring inventory and receivables. These a new fixed asset or opening a new decisions affect the day-to-day branch, etc. These decisions are very working of a business. These affect crucial for any business since they the liquidity as well as profitability of a affect its earning capacity in the long business. Efficient cash management, run. The size of assets, profitability inventory management and receivables and competitiveness are all affected by management are essential ingredients capital budgeting decisions. Moreover, of sound working capital management. these decisions normally involve huge amounts of investment and are Factors affecting Capital irreversible except at a huge cost. Budgeting Decision Therefore, once made, it is often almost Anumberofprojectsareoftenavailable impossible for a business to wriggle outto a business to invest in. But each of such decisions. Therefore, they need project has to be evaluated carefully to be taken with utmost care. These and, depending upon the returns, a particular project is either selected or rejected. If there is only one project, its viability in terms of the rate of return, viz., investment and its comparability with the industry’s average is seen. There are certain factors which affect capital budgeting decisions. (a) Cash flows of the project: When a company takes an investment decision involving huge amount it expects to generate some cash flows over a period. These cash flows are in the form of a series Wealth Maximisation Concept of cash receipts and payments over the life of an investment. The amount of these cash flows should be carefully analysed before decisions must be taken by those who considering a capital budgeting understand them comprehensively. A wrong capital budgeting decision decision. normally has the capacity to severely (b) The rate of return: The most damage the financial fortune of a important criterion is the rate business. Short-term investment of return of the project. These decisions (also called working capital calculations are based on the Reprint 2026-27