What is "capital budgeting"?

Capital budgeting refers to the planning process used by organizations to evaluate potential major investments or expenditures. This process is critical as it involves assessing long-term assets that are expected to benefit the company over several years, such as machinery, buildings, or technology upgrades. By focusing on long-term assets, capital budgeting helps businesses determine which investments will yield the best return on investment and aligned with the strategic goals of the organization.

The evaluation process may include projected cash flows, required returns, our risk analysis, and the overall impact on the company's financial health. This approach ensures that resources are allocated efficiently, promoting growth and sustainability in the long term. Understanding capital budgeting is crucial for financial decision-making and ensuring that a company remains competitive and profitable in the marketplace.