What is an optimal capital budget?


Quick Answer

To optimize the process of capital budgeting, it is critical to follow a logical step-by-step process that evaluates the probability of potential projects succeeding and an estimate of the costs associated with each, explains Financial Web. Optimal projects are affordable and match the company's goals.

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Full Answer

The purpose of capital budgeting is to make the best decisions on what projects the company invests in for the future, according to Financial Web. Typical projects evaluated during capital budgeting include opening a distribution center or the development of a new product. The first step in an optimal capital budgeting process is to identify the projects that are more likely to succeed and eliminate those that are likely to fail. It is important not to disqualify potentially profitable projects too early in the process without due consideration.

Once a list of potential projects is compiled, evaluate them in relation to the company's goals and whether they are affordable at the present time, recommends Financial Web. Once projects that do not suit the company's goals or are unrealistic are eliminated, estimate the impact the project will have on cash flow. The final step is to determine the correct project mix. Evaluate each project based on its own merits and how it fits in with the company's goals before making a decision.

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