How do I create a capital budget for a project? Also what is a capital budget?
A capital budget is a budget that is used as a tool for both analysis and planning. The capital budget is the process that is used to determine if and which projects are the most profitable for the company. Within the capital budget, we apply techniques and measurements that include net present value, an internal rate of return analysis, and other required methods as per the individual company. We then analyze the results to determine project viability. For example, any project that has a negative net present value is immediately discarded or abandoned, because it immediately shows that the company will incur a loss from the project/investment.
Through the capital budgeting process, management is then able to determine if the investments selected based on preliminary information are in-line with the company's capital budgeting goals and risk appetite. Even though a project as a positive net present value, some projects may be riskier than what it generally ...
This solution explains each of the main steps in creating a capital budget for project management.