A capital budget consists of two words: “capital” and “budget”. Capital expenditures in this context are capital expenditures on major expenditures such as the purchase of fixed assets and equipment, repair of fixed assets or equipment, research and development, expansion, etc.
Investment planning is a formal process for a company to assess potential costs or a significant investment. This includes the decision to invest current funds to add, sell, modify, or exchange fixed assets. As part of a capital plan, companies can assess cash inflows and outflows over the life of a potential project to determine if the potential revenue generated meets sufficient target benchmarks. The investment calculation process is also known as investment calculation.
There are different types of steps in capital budgeting. These are as follows :
Step 1 – Identifying good investment opportunities – Organizations must first identify investment opportunities. Investment opportunities can be anything from starting a new business to expanding the range of products to buying new assets.
Step 2 – Evaluation of all your investments – When an investment opportunity is recognized, the organization must evaluate the investment option. In other words, after you decide to add a new product/product to your product line, the next step is to decide how to purchase that product.
Step 3 – Capital Budgeting and Apportionment – After a project is selected, the organization must fund this project. Funding a project requires identifying funding sources and allocating them accordingly.
Step 4 – Performance review – The final step in the capital budgeting process is investment analysis. Businesses initially select specific investments to generate expected returns. Now they will compare the expected outcome of the investment with the actual performance.