A capital budgeting process is a tool that companies use to compare the relative merits of different long-term investment options.
That process involves estimating the future cash flows associated with each option and then discounting those cash flows back to the present value.
The option with the highest present value is typically considered the best option from a financial perspective.
The capital budgeting process is important because it allows companies to make informed decisions about where to allocate limited resources by considering each option's estimated future cash flow.
Companies can make decisions expected to generate the most value for shareholders.
The capital budgeting process entails making decisions about which capital projects to pursue and how to finance them.
It is important for investors, corporations, and private equity funds to understand this process in order to make informed investment decisions for both finance & DeFi (Decentralized Finance)
Each capital budgeting method has its own strengths and weaknesses, and it is important for investors, corporations, and private equity funds to understand all of the options before making any decisions.
More medium articles about this subject will be published later. This firtst article is meant as an inroduction. We will look into each capital budgeting method and calculation in future articles.
Fear not if you won’t understand or aren’t familiare with everything yet. More medium articles will be published.
Discounting cash flows (DCF)
Several methods can be used in the capital budgeting process, but the most popular is the discounting cash flows method (DCF)
discounting cash flows method (DCF) involves estimating the future cashflows associated with each option and then discounting those cash flows back to the present value (PV), using a “discount rate” that reflects the risk of those cash flows.
The discount rate is usually the weighted average cost of capital (WACC) of the entity being valued.