Capital Budgeting is the process of evaluating and selecting long-term investment projects to determine whether they are financially viable and profitable.
Capital Budgeting is a key financial decision-making process used by businesses to plan long-term investments such as purchasing machinery, expanding operations, launching new products, or acquiring assets.
The goal is to ensure that the investment generates returns higher than its cost and adds value to the business. Companies use various techniques to evaluate projects, including:
Capital budgeting helps businesses allocate resources efficiently, reduce financial risks, and make informed strategic decisions. Since these investments involve large amounts and long-term impact, careful analysis is essential.
"A company plans to invest ₹50 lakh in new machinery. After analyzing expected cash flows using NPV and IRR, the company decides whether the investment will generate sufficient returns over time."