Question

Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.
True / False.

Answer 1

Answer:

True.

Explanation:

Capital budgeting is the process whereby a business carries out an evaluation of potential major projects or investments. Examples of these investments and projects may include construction of a new plant or a big investment in an external venture.

A capital budget is risky because it is a plan for investing in long-term assets such as buildings and machinery, therefore, risk is inevitable.

The various risks include:

• Investment of large amounts of cash.
• Cash flows not being paid in time as agreed.
• The risk of the investee company collapsing.
• The management sinking the invested funds in risky projects.
• Decisions could be difficult or impossible to reverse.