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Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the goal of the firm.Capital expenditure decision affects the company's future cost structure over a long-time span.The investment in fixed assets increases the fixed cost of the firm, which must be recovered from the benefit of the same project.If the investment turns out to be unsuccessful in future or gives less profit than expected, the company will have to bear the extra burden of fixed costs.Such risk can be minimized through the systematic analysis of projects, which is an integral part of investment decisions.Capital investment decisions are not easily reversible without much financial loss to the firm because there may be no market for second-hand plants and equipment and their conversion to other uses may not be financially viable.Hence, capital investment decisions are to be carried out and performed carefully and effectively in order to save the company from such financial loss.The investment decision which is undertaken carefully and effectively can save the firm from huge financial loss aroused due to the selection of unfavorable projects.
Busareddypally et al. (Sat,) studied this question.