From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
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Capital budgeting overview
From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
Capital budgeting overview
- Capital budgeting is the process of making long-term asset purchase decisions. Because the cash flows from a long-term project are spread over many years, a proper capital budget analysis requires consideration of present values, future values, and interest rates. Making long-term asset purchases typically involves large amounts of money. So we're talking about a large initial outlay of cash. If we make a mistake with these large spending decisions, we can struggle to survive. Also, because a capital budgeting purchase locks a company into a long-term asset, there's a potential long-term impact on earnings. Long-term assets are with you for a long time. Mistakes will punish you year after year. Another reason capital budgeting is important is because long-term asset purchases are difficult to reverse. For example, assume we have gone through a capital budgeting process and have decided to construct a technically complex,…
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