What is Capital Budgeting?

Capital budgeting is the process of planning and managing larger investments in projects or assets that have
a long-term impact on the business. It involves evaluating various long-term investment opportunities and
deciding which projects to undertake.

By Pranali Sanas

TYBBA 2131070
Importance of Capital Budgeting
1 Strategic Decisions
Capital budgeting helps in making
strategic decisions to allocate resources
for the most profitable investments.
2 Risk Management
It aids in assessing the risks associated
with long-term investments and finding
ways to mitigate them effectively.

3 Resource Optimization
By carefully choosing investments, it ensures proper allocation and utilization of resources
for maximum returns.
Steps in the Capital Budgeting Process
1 Idea Generation
The first step involves gathering proposals for potential investments and business
expansion projects.

2 Evaluation
Assessing each project's potential returns, risks, and alignment with business goals.

3 Selection
Deciding which projects to pursue based on their viability and strategic fit with the
company.
Evaluation Methods for Capital
Budgeting
Payback Period Net Present Value Internal Rate of Return

Measures how long it takes to Calculates the present value of Evaluates the project's
recover the initial investment future cash flows to determine potential profitability by
through the project's cash the project's profitability. analyzing its rate of return.
flows.
Cash Flow Analysis in Capital
Budgeting
Predicting Cash Flows
Estimating the inflows and outflows of cash over the project's
lifespan.

Cash Flow Discounting

Discounting cash flows to their present value to evaluate the
project's worth.

Reinvestment Assumptions
Considering the reinvestment rate of project cash flows to make
accurate financial decisions.
Risk Analysis in Capital Budgeting
Market Risk Technological Risk
Evaluating how market fluctuations and Assessing the potential risks associated
economic conditions can impact project with adopting new technologies or
returns. processes.

Regulatory Risks
Analyzing the impact of changing regulations on the project's financial performance.
Conclusion and Key Takeaways
Capital Budgeting Enables informed decision-making for long-
term business investments.

Risk Management Helps anticipate and mitigate potential risks in

high-value projects.