Question

What is capital budgeting?

Hint:

Use NPV and IRR to evaluate the profitability and feasibility of investment projects.

Answer 1

Capital budgeting is the process through which an organization evaluates and selects long-term investments that are aligned with its strategic goals. It involves the planning and management of a firm's capital expenditures to ensure that resources are allocated in the most efficient manner. Capital budgeting helps firms assess the viability and profitability of large projects like machinery purchases, new product lines, or expansions. Key steps in capital budgeting: 1. {Project identification:} Identifying and selecting the projects that align with the company's long-term goals. 2. {Cash flow estimation:} Estimating the future cash inflows and outflows generated by the investment. 3. {Discount rate determination:} Determining the appropriate rate of return or discount rate to assess the project's profitability. 4. {Evaluation of investment projects:} Using various techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period to assess the feasibility of the project. Conclusion: Capital budgeting helps firms invest in projects that generate significant returns and contribute to long-term growth.
Final Answer: \[ \boxed{\text{Capital budgeting is the process of evaluating and selecting long-term investment projects based on their financial feasibility.}} \]