Consider the following two hypothetical statements from corporate managers

ANSWER

A) CAPITAL BUDGETING INVOLVES CHOOSING PROJECTS THAT ADD VALUE TO A COMPANY. THE CAPITAL BUDGETING PROCESS CAN INVOLVE ALMOST ANYTHING INCLUDING ACCURING LAND OR PURCHASING  FIXED ASSETS LIKE A NEW TRUCK OR MACHINERY.

CORPORATION ARE TYPICALLY REQUIRED OR AT LEAST RECOMMENDED TO UNDERTAKE THOSE PROJECTS THAT WILL INCREASE PROFIT ABILITY AND THUS ENCHANCE SHAREHOLDER WEALTH.

"SHAREHOLDER WILL NEVER KNOWN OUR CAPITAL BUDGETING DECISION" BECAUSE THE CAPITAL BUDGETING DECISION IS BOTH A FINANCIAL COMMITMENT AND AN INVESTMENT. BY TALKING ON A PROJECTS THE BUSSINESS IS MAKING A FINANACIAL COMMITMENT BUT ALSO INVESTING IN ITS LONGER TERM DIRECTION THAT WILL LIKELY HAVE AN INFLUENCE ON FUTURE PROJECTS THE COMPANY CONSIDERS.

WHEN A FIRM IS PRESENTED WITH A CAPITAL BUDGETING DECISION. ONE OF ITS FIRST TASK IS TO DETERMINE WHETHER OR NOT THE PROJECT WILL PROVE TO PROFITABLE. THE PAYBACK PERIOD (PB) INTERNAL RATE OF RETURN (IKK) AND NET PRESENT VALUE (NPV)METHODS ARE MOST COMMON APPROACHES TO PROJECT SELECTION.

B)

CAPITAL BUDGETING DECISIONS INVOLVE AN OUTLAY OF HUGE SOME OF MONEY . AND THESE TRANSACTION ARE TYPICALLY IRREVERSIBLE. IT IS THEREFORE IMPORTANT TO GET THE WHOLE PROCESS RIGHT IN THE FIRST STEP ITSELF. NO TRIALS AND ERRORS ARE AFFERDABLE AT THIS STAGE.

HOWEVER THE VERY NATURE OF CAPITAL BUDGETING DECISION IS SUCH THAT FLAW ARE SEWN INTO ITS FABRIC

MISCALCULATION AND SECOND GUESSING ARE INHERENT TO CAPITAL BUDGETING. THE VERY BASIS OF A CAPITAL BUDGETING DECISION IS AN ARRAY OF ASSUMPTION. THEREFORE THE REAL PICTURE MAY OFTEN TEND TO BE FAR FROM THE ANTICIPATED ONE.

AS THE RISK IS THE POSSIBILITY THAT THE CHOOSEN ACTION WILL NOT RESULT IN THE DESIRED OUTCOME. A CAPITAL BUDGETING PROJECT INVOLVES NUMEREOUS RISK.

SO THE " SHAREHOLDER WILL PUNISH THE COMAPNY WHEN WE HAVE MADE BAD CAPITAL BUDGETING DECISION