Most organizations, if not all, face a variety of opportunities (e.g. growth/expansion)
and issues (e.g. repair/replacement) requiring investment of assets representing long term
commitments. These capital investment decisions utilizes large amounts of resources which
are exposed to risk for long periods of time and may simultaneously affect the future
development of the firm, therefore, requiring managers to make sound decisions.
A sound capital investment will regain its original capital outlay (return of investment)
over the required time and, at the same time, provide a reasonable return on the original
investment. This is where capital budgeting techniques are useful. Any decision related to
capital expenditures such as business expansion, replacement of machinery, new plants, new
products, and research development projects requires an understanding of the risks and
returns involved. Capital budgeting creates accountability and measurability. With the use of
these techniques, managers are guided with regards to deciding on the suitability and
