Explain the factors that affect capital budgeting decision.

Factors that affect capital budgeting decision are:

(i) Cash flows of the project: Every project is expected to generate a series of cash receipts and payments over a long period of time. A project which is likely to give higher and stable cash inflows is preferred over the others.

(ii) Rate of Return: A risk-return trade-off is done to measure the feasibility of a project. A project with less risk and higher returns is preferable to other projects.

(iii) Investment Criteria: Various capital budgeting techniques like Net Present Value, payback period are used to assess the viability of a project. It includes a number of calculations like the amount of investment, interest rates, etc.

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