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Capital budget planning is a mechanism implemented by a company that is characterized by long-term planning which is focused on acquiring the necessary assets for large, capital expenditures. This is a formal plan to determine how funds will be acquired and invested to meet future needs; including the addition, disposition, modification and replacement of fixed assets.
When looking at capital budgeting companies anticipate large benefits which come from long term investments that are relatively high risk. A company may implement a plan when looking at adding a new product to its existing product line, or when acquiring new business property. Companies estimate current assets and attempt to project the need inflow and outflow of cash to make a future project viable. Risk versus reward is analyzed in order to insure that there are sufficient funds for the company to move ahead with capital projects maximize its market value.
In essence, it is a strategic investment plan for the future prosperity of a company based on its capital investment growth.
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