The capital budget or investment assessment is the planning process used to determine whether an organization's long-term investments, such as new machinery, replacement of machinery, new plants, new products and research development projects are worth financing Cash through the capitalization structure of the company (debt, capital or retained earnings). It is the process of allocating resources for large capital investments, or investment. One of the main objectives of investments in the capital budget is to increase the value of the company to shareholders.
Many formal methods are used in the capital budget, including techniques such as
• Accounting rate of return
• Average accounting yield
• Recovery period
• Net present value
• Index of profitability
• Internal rate of return
• Modified internal rate of return
• Annual equivalent cost
• Valuation of real options
These methods use the incremental cash flows of each potential investment or project. Sometimes techniques are used based on accounting results and accounting rules, although economists consider this to be improper, such as the accounting rate of return and the "return on investment". Simplified and hybrid methods are also used, such as the repayment period and the discount amortization period.
The capital budget is the process in which a company determines and evaluates the potential expenditures or the investments that are of great nature. These expenses and investments include projects such as building a new plant or investing in a long-term business. Often, the cash inflows and outflows of a prospective project are evaluated to determine if the potential returns generated reach a sufficient target benchmark, also known as "investment valuation."