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.

Exchange rate risk is one factor that can have an impact on capital budgeting. Exchange rates are constantly fluctuating and these fluctuations can have a direct influence on the cost of goods and services in different countries or regions. For example, if an investor is considering investing in a foreign market and there is devaluation of the currency, this could cause the value of their investment to drop significantly due to changes in exchange rates. This risks needs to be taken into account when making decisions about capital investments.

Political risk refers to the potential for changing government policies which could affect companies operating within a country or region. The uncertainty surrounding political outcomes can make it difficult for investors to evaluate potential projects, as they may not know how laws and regulations may change over time. Companies must also take into consideration transfer pricing when making decisions about capital investments. Transfer pricing refers to the practice of transferring profits from one company unit or subsidiary to another in order to reduce tax liabilities between two countries or jurisdictions; this has implications related to financial reporting and taxation rules across borders which need to be factored into capital budgeting 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.