Question

In your own words what is capital budgeting?

Answer 1

Capital Budgeting is a way to conclude over positive earning investments or projects which will yield the amount that covers the initial outlay and constantly produce a positive income source to the capital required by the company. This is a step by step process that involves the evaluation of a project either by calculating NPV or IRR. Although there are many methods to derive which project is viable and which is not , NPV is mostly considered to be a tool to be used. Discounted cash flows are used to determine the NPV. Profitability Index is another popular tool used to approve or to reject the project proposed. Projects can be mutually independent or exclusive, projects can be negative for a longer horizon but can give huge profits in the end, so tools used should be relevant to know which one is profitable or not, hence capital budgeting is helpful when tools are used in an effective manner.