Capital expenditure decisions are of considerable Significance’s the future success and growth of the firm depends heavily on them. But, they are beset with a number of difficulties.
Firstly the benefits from investments arc received in some future period. The future is uncertain. Therefore, an element of risk is involved. For instance a decision to acquire an asset that is going to last for 15 years requires a 15 year forecast. A failure 10 forecast correctly will lead to serious errors which can be corrected only at a considerable expense. Future revenue involves estimating the size of the market for a product and the expected share of the firm in that. These estimates depend on a variety of factors including price advertising and promotion and sales effort and so on. Adding to the uncertainties are the possibilities of shifts in consumer preferences the actions of competitors technological developments and changes in the economic or political environment.
Secondly, costs incurred and benefits received from the capital budgeting decisions. occur in different time periods. They are not logically comparable because of the time value of money. Thirdly it is not often possible to calculate in strict quantitative terms all the benefits or the. costs relating to a particular investment decision.