Capital Budgeting

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Dictionary Says

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".
Investopedia Says

Investopedia explains '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.

Related Definitions

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    Incremental Cost Of Capital

    A term used in capital budgeting, the incremental cost of capital refers to the average cost a company incurs to issue one additional unit of debt or equity. The incremental cost of ...
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  • Capital Rationing

    The act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment ...
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  • Conventional Cash Flow

    A series of inward and outward cash flows over time in which there is only one change in the cash flow direction. A conventional cash flow for a project or investment is typically ...
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    • Cost Of Capital

      The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity.
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    • Capital Reserve

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    • Internal Rate Of Return - IRR

      The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's ...
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    • Net Present Value - NPV

      The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or ...
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    • IRR Rule

      A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the ...
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    • Cost Of Debt

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    • Cost Of Equity

      In financial theory, the return that stockholders require for a company. The traditional formula for cost of equity (COE) is the dividend capitalization model: A firm's cost of equity ...
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