What is Capital Budgeting

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Capital budgeting is an integral part of the business process. Being able to make the most use of business capital such as money, human resources, equipment and others through proper budgeting will help propel the business forward to success. 

Capital budgeting is the type of budgeting that allocates money for the firm’s long term investments such as machinery, research, development projects, new products and others. Capital budgeting not only applies to businesses however but to individual investors as well. 

Super Rich and Aspirational Buyers

There are different kinds of buyers that investment firms often cater to: aspirational and the super rich buyers.  During tough times, one observes that those who have more tend to spend more. People at the lower end of the food chain are also more affected negatively in a recession. The businesses that cater to the super rich tend to be insulated during the times when the economy is not doing so well.

Aspirational buyers are the upper middle class buyers or the new rich. They may not be as liquid as the super rich but they are numerous. They make up a huge part of the population. Their sheer number could influence market trends. These “aspirational buyers” should not depend on their shares of stocks alone in times of recession or stock market weakness.

An important aspect of capital budgeting is to be able to account for the investment conservatively. The rule never to count the chickens unless they are hatched applies particularly to investments. Knowing the minimum acceptable return of the investment which is what we termed hurdle rate could help determine the future value of the said investment.

Being conservative in the estimate of investment returns in accounting for capital budgets is important. This is particularly true to investors who cannot afford to lose a lot of money. Since the super-rich have nothing to lose, the would-be affluent investors should be very cautious in using their capital budgets in investments.

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