Long Duration

• Deciding which investment or project to invest in is a long-term decision. A manager must consider that deciding to invest in a project will affect the firm positively or negatively for a long time. Proper capital budgeting ensures that you make decisions to invest only in profitable projects. You can use various capital budgeting decision rules such as payback period, net present value method, certainty equivalent or the internal rate of return to decide the most viable project to implement.
  
  

Wealth Maximization

• Capital budgeting involves selecting the project that will maximize the value of the shareholders' wealth. Analyze all the cash flows of the various projects under consideration. Discount the cash flows at a predetermined rate called cost of capital to adjust for risk and inflation. Select the project that maximizes the shareholders' wealth.
  
  

Competitiveness

• By applying capital budgeting decision rules in selecting the most viable project to undertake, you can raise the level of your firm's competitiveness. Viable projects provide the needed cash flows that are then used to improve the existing products. This liquidity can also provide the needed funds for branch expansion and for introducing newer products.
  
  

Irreversibility

• Whenever you make a decision to invest in a project, the results of this decision are irreversible. For example, sinking funds into putting up a building in a remote place where there are no growth prospects is not a wise idea. This is because you cannot reverse the decision, resulting in wastage of funds that could have been invested elsewhere. Capital budgeting provides you with various decision rules for selecting viable projects. This helps you avoid making costly investment decisions.
  
  

Complexity

• Making a decision about which project to pursue is a complex process. You must estimate future events such as economic booms and recessions that can significantly affect the cash flows of a project. Predicting such events is difficult. Capital budgeting helps you circumvent this problem by providing you with techniques for estimating future events; one such technique is trend analysis. This helps you to select the best project to undertake based on the available data.