Final answer:
True, the main goal of capital budgeting is to maximize the value of the firm by making informed investment decisions for long-term profitability and growth.
Step-by-step explanation:
The principal objective of capital budgeting is indeed to maximize the value of the firm. Capital budgeting involves making decisions about investments in the long-term assets of the company, such as machinery, new plants, or research and development projects. These decisions are crucial because they involve spending money now in the hopes of generating larger profits in the future. The efficient use of financial capital is an important aspect of this process. Firms often choose from various sources of financial capital, including early-stage investors, reinvesting profits, borrowing, or selling stock, and must consider the costs and benefits of each. In the long run, all factors of production are variable, allowing firms to choose the most efficient way of producing a given level of output without the constraints of fixed inputs. This long-term planning is designed to ensure profitability and healthy growth, thereby enhancing the firm's value. The firm's cost structure, from a long-run perspective, is analyzed by considering fixed and variable costs, average total cost, average variable cost, and marginal cost to make informed decisions on the profit-maximizing quantity to produce and the price to set.