Capital budgeting, meaning the process of evaluating and selecting long-term investments that are in line with the firm’s goal of wealth maximization, involves analyzing potential major projects or investments, such as new machinery, replacement machinery, new plants, new products, and research development projects. This process includes estimating future cash flows, assessing risk, and determining the project’s viability through techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).
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