Investment decisions can be long term or short term. A long term investment decision is also called a capita! budgeting decision. It involves committing the finance on a long term basis, e.g., making investment in a new machine to replace an existing one or acquiring new fixed assets or opening a new branch etc. These decisions are very crucial for any business. They affect its earning capacity over the long-run.

Assets of a firm, profitability and competitiveness, are all affected by the capital budgeting decisions. Moreover, these decisions normally involve huge amounts of investment and are irreversible except at a huge cost. Therefore, once made, it is almost impossible for a business to wriggle out of such decisions. Therefore, they need to be taken with utmost care. These decisions must be taken by those who understand them comprehensively. A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.