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Monday, August 15, 2005

Capital Budgeting

Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project and its cost. It can usually fall into one of four categories:
(1) the replacement of existing assets with like assets;
(2) the substitution of cost-reducing assets for existing assets;
(3) the expansion of productive capacity
(4) strategic investments.