Capital Budgeting: Wrapping It All Up
  1. Capital Budgeting: Introduction
  2. Capital Budgeting: The Importance Of Capital Budgeting
  3. Capital Budgeting: Evaluating The Desirability Of An Investment
  4. Capital Budgeting: Capital Budgeting Decision Tools
  5. Capital Budgeting: The Capital Budgeting Process At Work
  6. Capital Budgeting: Wrapping It All Up

Capital Budgeting: Wrapping It All Up

All for-profit business seemingly exist on the mandate of maximizing shareholder, or owner, value. A business is essentially a series of transactions that aim at generating greater revenue and profits. The capital budgeting process, or the methods employed by a company to invest in activities to generate additional value, is a dynamic process, to say the least.

In a way, a business is nothing more than a series of many capital budgeting decisions. Decisions to hire a new CEO, negotiate contracts, maintain efficient operations, compete in the mergers and acquisitions arena, among others, are all capital budgeting decisions, in one way or another. Even decisions to reduce employees, shut down a division or the sale of part or all the company are capital budgeting decisions. Businesses are often observed being sold under the mandate of maximizing shareholder value.

Whether minor or major, all business decisions involve an accounting of costs versus benefits. In a way, that's the essence of the capital budgeting process. Shareholders put their trust in management to constantly assess the costs versus benefits – the risk versus the reward – of their corporate actions. When a CEO is fired, it's often because a company has failed to create shareholder value. Put another way, that CEO or executive has failed to successfully engage in value-creating projects; the capital budgeting process under that CEO was ineffective.

Understanding the capital budgeting process is not only important from an intellectual standpoint, but vital to understanding how a business can and will create future value. The world's greatest executives – Sam Walton of Wal-Mart, Roberto Goizueta of Coca Cola, Warren Buffett at Berkshire Hathaway, Jack Welch at General Electric – have a long history of making value creating decisions. These executives got capital budgeting process right.

Individual investors also benefit from the capital budgeting process. Investing in a company's stock is much like investing in a project. At a given share price, investors ought to be able to figure out if that share price is below the intrinsic value of those shares. One determines the intrinsic value by conducting a discounted cash flow analysis, essentially finding the net present value of that company. Being able to seek out undervalued investments is clearly the ultimate objective for investors and corporate executives. In one form or another, the capital budgeting process is the set of tools that facilitates that value seeking process.


  1. Capital Budgeting: Introduction
  2. Capital Budgeting: The Importance Of Capital Budgeting
  3. Capital Budgeting: Evaluating The Desirability Of An Investment
  4. Capital Budgeting: Capital Budgeting Decision Tools
  5. Capital Budgeting: The Capital Budgeting Process At Work
  6. Capital Budgeting: Wrapping It All Up
RELATED TERMS
  1. Balanced Budget

    A situation in financial planning or the budgeting process where ...
  2. Performance Budget

    A budget that reflects the input of resources and the output ...
  3. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs ...
  4. Promotional Budget

    A specified amount of money set aside to promote a business' ...
  5. Federal Budget

    The federal budget is an itemized plan for the annual public ...
  6. Capital Flows

    The movement of money for the purpose of investment, trade or ...
RELATED FAQS
  1. How does a nation's national debt affect the budget process?

    See how the national debt has traditionally impacted, or purported to impact, the budgeting process for the U.S. federal ... Read Answer >>
  2. What's the difference between budgeting and financial forecasting?

    Learn about financial budgeting and financial forecasting and the main differences between the two management decision-making ... Read Answer >>
  3. Is there a difference between the cash budget and a credit budget?

    Learn more about how cash flow is detailed in cash budgets and how credit budgets work. Find out what these budgets reveal ... Read Answer >>
  4. Why should I bother creating a budget?

    Creating and using a budget is a valuable tool for all demographics; it's not just for those who need to closely monitor ... Read Answer >>
  5. How do you use internal rate of return to calculate a capital budget?

    Learn about how the internal rate of return is used in the creation of a capital budget along with net present value and ... Read Answer >>
  6. How can you use a cash flow statement to make a budget?

    Understand how a cash flow statement can be used to create a company budget. Learn the difference between a cash budget and ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center