What are the risks and uncertainties in capital budgeting decisions ?

Risk and uncertainty are quite inherent in capital budgeting decisions. This is so because investment decisions and capital budgeting are actions of today which bear fruits in future which is unforeseen. Future is uncertain and involves risk. The projection of probability of cash inflows made today are not certain to be achieved in the course of future. Seasonal fluctuations and business cycles both deliver heavy impact upon the cash inflows and outflows projected for different project proposals. The cost of capital which offers cut-off rates may also be inflated or deflated under business cycle conditions. Inflation and deflation are bound to effect the investment decision in future period rendering the degree of uncertainty more severe and enhancing the scope of risk. Technological developments are other factors that enhance the degree of risk and uncertainty by rendering the plants or equipments obsolete and the product out of date. Tie up in the procurement in quantity and/or the marketing of products may at times fail and frustrate a business unless possible alternative strategies are kept in view.