Capital budgeting refers to a gradual process that is used by businesses to establish investment project merits. The decision on if to deny or accept an investment project as growth initiatives of a company entails establishing the rate of return of an investment of this kind can generate. Capital budgeting is essential since it generates measurability and accountability. The process of capital budgeting is a business assessment techniques to establish the long-term financial and economic profitability of any kind of investment project.
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Investment approved through capital budgeting must be able to demonstrates measurable investment return period and a reasonable period of making profit before it is written off . This demonstrates that, capital budgeting involves assessing the rate of return of an investment, and based on the outcome, one can decide whether the investment is profitable or not, and for how long the organization can depend on it as a source of income.
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Based on the kind of the institution, capital budgeting ensures that the approved investments have the ability to generate a certain level of income per a certain period, within a specific lifetime of the investment. This is like a guaranteed earning when the facility is used as required. In this regard, the investment demonstrates a high level of income sustainability compared to other investments not based on capital budgeting.
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Moreover, budgeting ensures the amount invested does not exceed the amount to be earned, and that the investment must be able to return the investment cost within the shortest time period. This ensures sustainable growth in that, the organization will only invest on projects that guarantee good return to the company. With every investment demonstrating positive return, the organization can easily be profitable enough to continue investing and expanding further (Meyer& KIyma, 2015).
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