From the course: Finance Foundations
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Capital budgeting overview
- [Instructor] Capital budgeting is making long term asset purchase decisions. Capital, that's the word we use to refer to the financing obtained by a company in order to buy these long term assets. Budgeting, that is numerically planning what we can expect in terms of earning a return on this asset that we're going to buy. Making long term asset purchases 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 could 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 assets purchases are difficult to reverse. Let me give you an example of the capital budgeting decision process. Franklin Noodle Shop is considering the purchase of a new…
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