What is Capital Budgeting?

Capital Budgeting is the process a business uses to evaluate potential major projects or investments. These are decisions about long-term investments, such as building a new factory, buying expensive machinery, or launching a new product line. The goal is to determine whether a project will generate a sufficient return to justify the initial investment.

For Startups: While startups may not engage in capital budgeting in the traditional corporate sense, the underlying principles are the same. When deciding whether to invest heavily in a new feature or a new marketing channel, a founder is essentially making a capital budgeting decision. They are weighing the upfront cost against the expected future cash flows and returns.

Techniques: Common methods used in capital budgeting include Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period analysis.