What types of risk impact upon the capital budgeting decision? Why and to whom are these risks important and how might they be incorporated into the techniques used to evaluate fixed asset investments?

Introduction

A number of factors combine to make capital budgeting decisions perhaps the most important ones financial managers and their staff must make. There are a huge number of variables that must be considered although many can be defined as neglible due to their probability of occurrence. However the cost of failure is great with companies facing bankruptcy if their market judgement is vastly incorrect. This report then focuses on evaluating the major risks that effect capital budgeting decisions and how that information can aid the techniques used to analyse fixed asset investments.



Replacement and Expansion

First, since the result of capital budgeting decisions have an impact for many years, the firm will lose some of its flexibility. For example, the purchase of an asset with an economic life of ten years locks the firm in for a ten year period. Further because asset expansion is fundamentally related to expected future sales a decision to buy an asset that...