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Capital Budgeting

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 26 Apr 2023

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Capital Budgeting

Capital budgeting is the process of analyzing and evaluating potential investments or expenditures to determine whether they are worth pursuing. It is a critical part of the financial decision-making process for businesses, governments, and other organizations. Capital budgeting involves assessing the expected returns of a proposed investment, the risks associated with it, and the amount of capital required to finance it. The goal is to determine whether the expected returns are sufficient to justify the investment.

History of Capital Budgeting

The concept of capital budgeting has been around for centuries. The earliest known reference to capital budgeting dates back to the 16th century, when Italian economist and philosopher Niccolรฒ Machiavelli wrote about the importance of assessing the costs and benefits of a proposed investment. In the 19th century, British economist John Stuart Mill wrote about the concept of capital budgeting in his book Principles of Political Economy.

The modern concept of capital budgeting was developed in the early 20th century by American economist Irving Fisher. Fisher’s work focused on the concept of net present value (NPV), which is a key component of capital budgeting. NPV is used to determine the expected return of a proposed investment, taking into account the time value of money and the associated risks.

Comparison Table

Investment Expected Return Risk Capital Required
Investment A 10% Low $100,000
Investment B 20% High $500,000

Summary

Capital budgeting is a critical part of the financial decision-making process for businesses, governments, and other organizations. It involves assessing the expected returns of a proposed investment, the risks associated with it, and the amount of capital required to finance it. The goal is to determine whether the expected returns are sufficient to justify the investment. For more information on capital budgeting, you can visit websites such as Investopedia, The Balance, and the U.S. Small Business Administration.

See Also

  • Net Present Value (NPV)
  • Discounted Cash Flow (DCF)
  • Internal Rate of Return (IRR)
  • Payback Period
  • Cost-Benefit Analysis
  • Risk Analysis
  • Cash Flow
  • Return on Investment (ROI)
  • Opportunity Cost
  • Capital Expenditure (CAPEX)

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