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:
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 Terms:
Build-Operate-Transfer Contract
Capital Rationing
Capital Reserve
Cost Of Capital
Cost Of Debt
Cost Of Equity
Earmarking
Internal Rate of Return - IRR
Net Present Value - NPV
Static Budget |