Capital budgeting is a process used by businesses to evaluate potential major projects or investments. It is a long-term plan that outlines the financial demands of an investment, development, or major purchase. Capital budgeting involves choosing projects that add value to a company, and the process can involve almost anything, including acquiring land or purchasing equipment. The primary purpose of capital budgeting is to identify projects that produce cash flows that exceed the cost of the project for a company.

Capital budgeting methods include discounted cash flow, payback analysis, and throughput analysis. The major goal of capital budgeting is to rank projects, as most organizations have many projects that could potentially be financially rewarding. Once it has been determined that a particular project has exceeded its hurdle, then it should be ranked against peer projects, with the highest ranking projects being implemented until the budgeted capital has been expended.

Capital budgeting investments and projects must be funded through excess cash provided through the raising of debt capital, equity capital, or the use of retained earnings. Debt capital is borrowed cash, usually in the form of bank loans or bonds issued to creditors, while equity capital are investments made by shareholders who purchase shares in the companys stock. Retained earnings are excess cash surplus from the companys present and past earnings.

A capital budgeting decision is typically a go or no-go decision on a product, service, facility, or activity of the firm. It requires sound estimates of the timing and amount of cash flow for the proposal, and the capital budgeting model has a predetermined accept or reject criterion.

In summary, capital budgeting is a process used by businesses to evaluate potential major projects or investments, with the primary purpose of identifying projects that produce cash flows that exceed the cost of the project for a company. It involves choosing projects that add value to a company and ranking them against peer projects. Capital budgeting investments and projects must be funded through excess cash provided through the raising of debt capital, equity capital, or the use of retained earnings.