Capital budgeting

Definition

Capital budgeting is the process by which a business evaluates and selects long-term investments that are likely to yield the highest returns over time. This involves analyzing potential projects or investments to determine their feasibility and impact on the company's financial future.

Related terms

Net Present Value (NPV): A calculation used in capital budgeting to assess the profitability of an investment or project by determining the difference between the present value of cash inflows and outflows.

Internal Rate of Return (IRR): The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, used as a gauge for investment efficiency.

Payback Period: The time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment, used as a measure of risk and liquidity