Describe in brief the greatest difficulties faced in capital budgeting in the real world.

CPA-Financial-Management-Section-3 Revision kit

Difficulties faced in capital budgeting

– Uncertainty of variables e.g annual cash flows, discounting rates, changes in technology, inflation rate, changes in tax rates etc.
– Lack of adequate capital to undertake all viable profits (capital rationing)
– Lack of adequate information on the available investment opportunities e.g in case of mutually exclusive profits NPV and IRR will have conflict in banking of profits under some circumstances.
– Identification of all the quantifiable and non quantifiable costs and benefits association with a project.

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