What is capital budgeting?

Capital budgeting is the process companies use to evaluate and decide on potential long-term investments or projects. These projects might include purchasing new machinery, launching new products, or expanding into new markets. The goal of capital budgeting is to determine whether an investment is worth pursuing based on its expected future cash flows and profitability. Common techniques used in capital budgeting include net present value (NPV), internal rate of return (IRR), payback period, and profitability index. These methods help assess the value the project will bring to the company over time. A key aspect of capital budgeting is risk evaluation, as future returns are uncertain. Effective capital budgeting ensures that resources are allocated efficiently and that investments contribute to the company's long-term financial growth and stability.