Capital budgeting is related to the process of evaluating and planning long- term investments or projects that require significant capital expenditure. It involves estimating the financial viability of investments such as purchasing machinery, constructing new facilities, or expanding operations by focusing on cash inflows and outflows over the life of the investment rather than just accounting profits
. Key aspects of capital budgeting include:
- Assessing whether a project or investment will add value to the company and generate returns exceeding its costs
- Using financial metrics like net present value (NPV), internal rate of return (IRR), and payback period to evaluate projects
- Planning and allocating resources for large-scale capital projects within financial constraints
- Supporting long-term financial planning and decision-making to maximize shareholder value and company growth
- Differentiating from working capital management, which focuses on short-term financial operations; capital budgeting focuses on long-term investments
Overall, capital budgeting is a strategic financial management tool used by companies to decide which major projects or fixed asset purchases to pursue, ensuring that limited resources are invested in the most profitable opportunities
