The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.
Also known as "investment appraisal."
Importance to financial management
-Capital budgeting is an essential tool in financial management
-Capital budgeting provides a wide scope for financial managers to evaluate different projects in terms of their viability to be taken up for investments
-It helps in exposing the risk and uncertainty of different projects
-It helps in keeping a check on over or under investments
-The management is provided with an effective control on cost of capital expenditure projects
-Ultimately the fate of a business is decided on how optimally the available resources are used