Capital budgeting

To select the best long-term investments, firms rely on a process called ‘capital budgeting’. There is typically a lot of uncertainty around major investments, and the techniques of capital budgeting are a useful way of reducing that uncertainty and clarifying the likely returns on the investment. There are several different techniques, each with their own pros and cons.

When to use it

  • To decide whether a firm should make a capital investment.
  • To evaluate the relative attractiveness of several potential projects.


Capital budgeting as a tool has been around at least since humans began farming. Historian Fritz Heichelheim believed that capital budgeting was employed in food production by about 5,000 BC. He noted ...

Get Key MBA Models now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.