Capital budgeting
Principles of Finance glossary · Capital Budgeting
Definition
The process of evaluating long-term investment projects.
Capital budgeting in plain English
Capital budgeting is how a company decides which big, long-lasting projects are worth its money — building a new factory, launching a product line, buying expensive machinery. The core question is always the same: will the cash this project brings in over the years be worth more than the cash we pour in today? It's the grown-up, spreadsheet version of you deciding whether to spend your savings on a $500 lawn mower to start a mowing business — you weigh what you'll earn against what it costs and whether a different use of the money would pay off better. Because these bets are large and hard to reverse, companies use careful math (like comparing future cash to today's dollars) instead of just going with a gut feeling.
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