From the course: Accounting Foundations: Managerial Accounting

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Understanding capital budgeting

Understanding capital budgeting

From the course: Accounting Foundations: Managerial Accounting

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Understanding capital budgeting

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- No matter what a company's underlying strategy is, it must make long-term investment decisions in buildings, equipment, information technology, personnel, and so forth. Capital budgeting is the process of determining whether the future benefits stemming from these strategic decisions are sufficient to justify the significant upfront associated costs. In short, capital budgeting involves a comparison of the magnitude of upfront costs to the magnitude of estimated future multi-year benefits. In business capital is defined as the total amount of money or other resources owned or used by an individual or a company to acquire future income or benefits. Thus capital is something to be invested with the expectation that it will be recovered along with a profit. And capital budgeting is the planning for that investment. Now from a quantitative standpoint, the success of the investment depends on the amount of net future cash…

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