Capital budgeting is a process used by businesses to evaluate potential major projects or investments. It is a method of estimating the financial viability of a capital investment over the life of the investment. Capital budgeting involves identifying the cash inflows and outflows rather than accounting revenues and expenses flowing from the investment. The main goal of capital budgeting is to identify projects that produce cash flows that exceed the cost of the project for a company.

Capital budgeting is typically considered a non-core business activity as it is not part of the revenue model or models of most types of firms, or even a part of daily operations. However, it holds a strategic financial function within a business. Capital budgeting is used by companies to evaluate major projects and investments, such as new plants or equipment.

The major methods of capital budgeting include discounted cash flow, payback analysis, and throughput analysis. Each of these methods has advantages and disadvantages. For example, the payback period is simple and fast, but economically unsound. It ignores all cash flow after the cutoff date, it ignores the time value of money, and it does not account for risk.

In summary, capital budgeting is a process used by businesses to evaluate potential major projects or investments. It involves identifying the cash inflows and outflows rather than accounting revenues and expenses flowing from the investment. The main goal of capital budgeting is to identify projects that produce cash flows that exceed the cost of the project for a company. The major methods of capital budgeting include discounted cash flow, payback analysis, and throughput analysis.