The process of capital budgeting is an essential step in the overall financial planning process for a business. This process helps ensure that the company is making sound investments in its long-term future by analyzing potential capital expenditures and determining whether the acquisition will provide a return on investment (ROI) more significant than the company's required rate of return.
There are several different steps involved in the capital budgeting process, including:
1. Determining the company's overall financial goals and objectives.
2. Establishing the required rate of return for each type of investment.
3. Analyzing potential investments and calculating their expected ROI.
4. Comparing the expected ROI to the required rate of return to determine whether or not to proceed with the investment.
5. When necessary, adjust assumptions about the project until it is deemed acceptable by both management and investors.
Also Check: Types of Capital Budgeting
Even though most companies hire financial professionals to help them manage their company's finances, all businesses are expected to understand how capital budgeting works in their specific industry. This knowledge will enable each business owner to make better decisions that contribute towards reaching their overall goals for growth and success. [