Such decisions consist of allocation of the resources of the firms with carefully laid out plans to recoup the initial investment as well as adequate returns in the form of cash flows or other benefits that are expected to be generated during the economic life of the asset or investment. It is hard to reverse such capital budgeting decisions without severely disturbing an organization economically or in any other manner. Therefore it becomes critically important for any firm to make its capital budgeting decisions after a systematic and careful analysis of all associated risks and issues. But it must be noted that the capital budgeting decisions are many sided analysis. The process of this analysis involves estimation and forecasting of the current and future cash flows and the economic evaluation of alternative projects on hand. "Since in reality the cash flow estimations take place in a non-deterministic environment, full of complex interplay of conflicting forces, an exact description about cash flows is virtually impossible"(Chandra Prakash Gupta). Therefore it becomes important that the firm attempts to develop procedures and techniques that help the firm to make a meaningful analysis and evaluation of all the alternatives available in its hands before any decision is taken to invest money in any of the projects. This also makes the decisions of capital budgeting risky and difficult to retrieve.
Capital budgeting is primarily concerned with fairly large investments in long-term assets. The assets may be tangible like property, plan, and equipment or intangible like new technology, patents, or trademarks. Irrespective of the nature of the assets, the capital expenditures have two characters; one is that they are meant to be a long term investment and secondly their benefits or cash flows are expected to be spread over many years. These characteristic features make the capital expenditure decisions very important for a firm. The capital expenditure decisions since have a considerable impact on the organization's future cash flows there is a considerable