Capital budgeting is the process that a business uses to determine which proposed fixed asset purchases it should accept, and which should be declined. This process is used to create a quantitative view of each proposed fixed asset investment, thereby giving a rational basis for making a judgment (Bragg 2018). I think that capital budgeting is the most important process that a firm does undertake. This is supported due to the idea that capital budgeting sets the stage for what is to come for the firm. Secondly, the expense budgeting is important next to the capital budgeting. The general idea that capital budgeting gives wind to the what goes into the expense reporting. Essentially it becomes the foundation of expenses the firm may have. If a firm is able to successfully budget their capital, resources, and assets, then they will most likely have a positive financial trend. When a firm budgets capital they are moving towards the objective to supply for money for return to the business. In other words, the financial supply will be replenished to keep the firm afloat, if capital budgeting is done correctly. Managing the investments means that the return should be capitalized on so that the return is great for the firm.
If a firm is able to choose projects that benefit the company as a whole then the project should be implemented. Companies often use a decision rule that says, if the rate of return is greater than the firm’s weighted average cost of capital then accept and invest in the project (Peavler 2018). This means that if a firm sees that the rate of return they can take the opportunity and move forward because it will benefit the firm. Overall, I think that the capital budgeting process is the most important as it affects the other monetary values that a firm has to work with.
Berk, J., DeMarzo, P. Corporate Finance. [Bookshelf]. Retrieved from https://full-bookshelf.vitalsource.com/#/books/9780134202785/
Bragg, S. (2018, February 21). Capital budgeting. Retrieved October 31, 2019, from https://www.accountingtools.com/articles/what-is-capital-budgeting.html.
Peavler, R. (2018, November 4). Make Informed Capital Investment Decisions. Retrieved October 31, 2019, from https://www.thebalancesmb.com/capital-budgeting-and-its-importance-in-business-392912.
