Capital budgeting is the planning process used to determine which of an organization's long term investments are worth pursuing.
The main goals of capital budgeting are not only to control resources and provide visibility, but also to rank projects and raise funds.
Capital budgeting requires a thorough understanding of cash flow and accounting principles, particularly as they pertain to valuing processes and investments.
Several methods are commonly used to rank investment proposals, including NPV, IRR, PI, payback period, and ARR.
NPV and PI assume reinvestment at the discount rate, while IRR assumes reinvestment at the internal rate of return.
Long-term financing is generally for assets and projects and short term financing is typically for continuing operations.