Which statement best describes the purpose of capital budgeting?

Which statement best describes the purpose of capital budgeting?

• A. Both planning capital investments and evaluating and selecting best projects from a range of alternatives
• B. Managing daily cash flows
• C. Planning capital investments
• D. Evaluating and selecting best projects from a range of alternatives

Answer: (A)

Capital budgeting is the process a company uses to evaluate and select long-term investments in assets and projects. It involves both planning for future capital needs and evaluating opportunities to choose the best ones among alternatives, based on expected cash flows, risk, and returns. That is why the statement that combines planning capital investments with evaluating and selecting the best projects from a range of alternatives best describes capital budgeting. The other options miss part of the process: planning alone doesn’t address choosing among options, evaluating alone doesn’t cover the initial identification and planning of investments, and managing daily cash flows pertains to working capital, not long-term capital budgeting.

Capital budgeting is the process a company uses to evaluate and select long-term investments in assets and projects. It involves both planning for future capital needs and evaluating opportunities to choose the best ones among alternatives, based on expected cash flows, risk, and returns. That is why the statement that combines planning capital investments with evaluating and selecting the best projects from a range of alternatives best describes capital budgeting. The other options miss part of the process: planning alone doesn’t address choosing among options, evaluating alone doesn’t cover the initial identification and planning of investments, and managing daily cash flows pertains to working capital, not long-term capital budgeting.