Capital Budgeting


DEFINITION of 'Capital Budgeting'

The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Also known as "investment appraisal."


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BREAKING DOWN 'Capital Budgeting'

Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time.

Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.

  1. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present ...
  3. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  4. Equivalent Annual Annuity Approach ...

    One of two methods used in capital budgeting to compare mutually ...
  5. Replacement Chain Method

    A capital budgeting decision model that is used to compare two ...
  6. Conventional Cash Flow

    A series of inward and outward cash flows over time in which ...
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  1. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
  2. What are common concepts and techniques of managerial accounting?

    The common concepts and techniques of managerial accounting are all the concepts and techniques that surround planning and ... Read Full Answer >>
  3. Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >>
  4. Do you discount working capital in net present value (NPV)?

    Net present value (NPV) calculations should include the discounted value of changes in working capital. This treatment of ... Read Full Answer >>
  5. How is working capital different from fixed capital?

    There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>
  6. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>

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