Question

When we think of "capital budgeting" in for-profit accounting, what sorts of things do we do? Should a government use any capital budgeting tools?

Answer 1

Capital budgeting is a process of evaluating future projects for the company. The future project may be buying new machinary for the company, building new plant etc. To asses the project first the cash inflow and outflows related to projects are estimated. Then, there are many methods that company can use to determine the acceptability of the projects such as NPV analysis, IRR analysis, Payback period etc. Using these analyses it is determined whether the project will meet the benchmark set by the company or not. If it does, then the project is accepted.

Government projects are usually big investment project and hence it needs to be reviewed critically. Capital budgeting helps in assessing the long-term benefits and costs of the project and assessing the profitability of the project. Therefore government should use capital budgeting tools to assess the projects.