The Role of Financial Modeling in Capital Budgeting Decisions: Risks and Opportunities

Abstract

Capital budgeting decisions, which involve the allocation of significant resources toward long-term investments, are critical for organizational success. Financial models play a key role in informing these decisions by providing quantitative projections of future outcomes. This paper examines the role of financial modeling in capital budgeting, focusing on both the opportunities and inherent risks. It analyzes how these models aid in evaluating potential investments while highlighting areas where they may oversimplify complex realities. The paper stresses the importance of understanding model limitations and potential biases to ensure that capital budgeting decisions are made with a balanced understanding of both quantitative analysis and qualitative factors.