What is Capital Budgeting?
Capital budgeting is defined as the process of planning for projects on assets with cash flows of a period greater than one year.
These projects can be classified as:
· Replacement decisions to maintain the business
· Existing product or market expansion
· New products and services
· Regulatory, safety and environmental
· Other, including pet projects or difficult to evaluate projects
Additionally, projects can also be classified as mutually exclusive or independent:
- Mutually exclusive projects indicate there is only one project among all possible projects that can be accepted.
- Independent projects are potential projects that are unrelated, and any combination of those projects can be accepted.
The Importance of Capital Budgeting
Capital budgeting is important for many reasons:
- Since projects approved via capital budgeting are long term, the firm becomes tied to the project and loses some of its flexibility during that period.
- When making the decision to purchase an asset, managers need to forecast the revenue over the life of that asset.
- Lastly, given the length of the projects, capital-budgeting decisions ultimately define the strategic plan of the company.
For more on capital budgeting, check out our basic tutorial.
The Cost of Capital
Small BusinessCapital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”
Personal FinanceLearn how to break down and understand a corporate budget.
Small BusinessWhile supervision is one important part of the job, a lot more goes into project management than just watching everyone work.
Managing WealthA significant number of M&A transactions result in failure. Here are the top reasons, with examples, of why it happens.
Personal FinanceDiscover more about the specific tasks that project managers are responsible for and the average salary that can be expected in such a position.
Personal FinanceMake a career choice with some longevity. Find out where to look.
Personal FinanceLearn more about what project managers job, the qualifications necessary for the position and the most common careers for these professionals.