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Capital budgeting is the process through which companies decide about their long-term (>1 year) investments. Understanding of capital budgeting is important because (a) they can decide the future of companies due to their size and (effectively) irreversible nature, (b) principles of capital budgeting is also used for many other corporate decisions, such as leasing, (c) valuation principles in capital budgeting are also used in security analysis and portfolio management, and many innovations in security analysis are also adapted for capital budgeting, and (d) analysis can use any information deduced about capital budgeting techniques used by a company to see whether it has accounting focus or economic focus.
While the actual capital budgeting process depends on the level of decision making, size of project and company, following are the steps involved in a typical capital budgeting process:
Planning for capital investments may require input from a number of people/departments and the authority needed to undertake investments depends on the complexity and size of the project.
Capital budgeting projects are often classified into:
by Obaidullah Jan, ACA, CFA on Wed Feb 26 2020
This article can help you prepare for Reading 32 LOSa.
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