Capital budgeting is a management process that involves evaluating of the investments of the company to determine where there are viable or not and thus determine whether to accept the project or reject it all together. Some of the investment decisions that has to be made by the companies include replacement decisions for the company's fixed assets such as machinery, introduction of new products to the already existing products produced by the company, engaging in long term investments such purchasing shares of other companies among other investment.
Essentially it is the requirement of the management to pursue all the investments options that are available to the company in order to create wealth of the owners of the company or the shareholders but the resources available to the company are not sufficient and thus the management are required to conduct project appraisal in order to determine the projects that would bring the maximum return to the investors.
It is important for organizations to engage in capital budgeting before they invest in a certain projects because of the enormous resources required to start the project. Incase the project fails there would be huge losses that would be incurred by the firms. Another reason is that the investments decisions that peoples make are not easily reversible, the projects that the company invest in have a long term implications on the operations of the organization and lastly due to the fact that the investments involves risks
