The Capital Budgeting decisions generally involve very large amount of capital funds. However, the availability of such funds is very limited. It is therefore, essential that thoughtful and wise decisions are made concerning such investment of capital funds. This alone would result in flow of profits for the firm.

Capital Budgeting involves the employment of capital funds in the activities of the firm on a long-term basis. This increases the financial risk involved in such investment decisions. This necessitates the careful and efficient planning of capital expenditure. This is because any wrong and unwise decision may prove disastrous for the firm.

Such a decision leads to unwanted expansion of assets, which may result in heavy operating costs to the firm. On the other hand, inadequate and untimely decisions may plunge the company into a financial morass. This may weaken the competitive strength of the firm. Thus, it is clear from the above that capital decisions determine the future destiny of a firm.

Capital expenditure decisions are irreversible in nature. Once the decision to commit long-term funds is made, especially on the acquisition of assets, it would prove suicidal to go back on such a decision. This is because such assets, once required, could not be disposed off without incurring huge losses. Hence, capital expenditure decisions are considered significant.

Capital expenditure decisions have a long-term and significant impact on the profit-earning capacity of a firm. This is because, as funds are committed in assets, they not only improve the current earnings, but also significantly contribute to the overall and long-term profitability of the firm. Any unwise and thoughtless decision may prove to be fatal to the very existence and survival of the firm. Hence, Capital Budgeting decisions are of vital importance. Such decisions could guard against both over- investment and under- investment in fixed assets.