Capital budgeting can be affected by exchange rate risk, political risk, transfer pricing, and strategic risk. Explain how these factors may and can impact capital budgeting.

One factor that could have an effect on capital budgeting is exchange rate risk. These fluctuations are a constant factor in exchange rates and they can directly impact on the costs of goods and services across different regions or countries. If a foreign investor decides to invest in an investment market, and the currency is devalued, it could lead to a significant drop in the price of their investment. These risks should be considered when making capital investment decisions.

The potential change in government policies that could impact companies and organizations operating within a particular country or region is called political risk. Investors may find it hard to assess potential projects due to uncertainty around political outcomes. They may not be aware of how laws or regulations might change over time. Transfer pricing must be considered by companies when making investment decisions. The practice of moving profits from one unit to another to lower tax liability between countries or jurisdictions is known as transfer pricing. This has consequences for financial reporting and international taxation laws that must be considered when making capital investment decisions.

Finally, strategic risk should be considered when evaluating potential capital projects as such risks refer o any unforeseen event that disrupts business operations or planned strategies including new competitors entering a market, technological disruptions, etc.. It’s important for companies considering long-term investments assess all possible sources of strategic risk before committing resources since this type of risk has broad implications related with resource allocation, marketing plans and overall corporate goals.