What is capital budgeting?

Capital budgeting refers to the process of planning and managing long-term investments by evaluating potential expenses and income of projects. It involves the assessment of various investment opportunities to determine which projects will yield the best returns over time. This is crucial for businesses as it helps in allocating resources efficiently to projects that align with the organization's strategic goals, ensuring sustainable growth.

This process typically includes analyzing the expected cash flows, the cost of capital, and the potential risk associated with different investments. By using techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and payback period analyses, companies can make informed decisions on which projects to pursue, thus maximizing their profitability and ensuring optimal resource utilization for long-term success.