115 CFA
File: Corporate Finance - Reading 32 - 1. Capital Budgeting Introduction

1. Capital Budgeting: Introduction

a. describe the capital budgeting process and distinguish among the various categories of capital projects;

What is capital budgeting?
Capital budgeting is the process of planning expenditures on assets (fixed assets) whose cash flows are expected to extend beyond one year. Managers analyze projects and decide which ones to include in the capital budget.

What are the typical steps in the capital budgeting process?
- Generating good investment ideas to consider.
- Analyzing individual proposals (forecasting cash flows, evaluating profitability, etc.).
- Planning the capital budget. How does the project fit within the company's overall strategies? What's the timeline and priority?
- Monitoring and post-auditing.

In terms of capital budgeting what is a Replacement Project?
- Replacement decisions to maintain a business.
- Replacement decisions to reduce costs.

In terms of capital budgeting what is an Expansion Project?
Expansion into new products, services, or markets that involve strategic decisions and explicit forecasts of future demand.

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