Capital budget
In one sentenceThe spending plan for long-term assets such as equipment, buildings and new branches, with an assessment of each investment's feasibility before it is approved.
Simply put
The capital budget covers big decisions that last for years: buying a machine, opening a branch, or renewing a fleet. The amounts are large and the decision is hard to reverse.
So you evaluate each project with tools such as the payback period, net present value and internal rate of return, then choose what gives the best return within the financing you have.
Worked example
A factory is considering buying a machine costing 200,000 SAR, and expects it to give a net cash flow of 50,000 SAR each year.
Machine cost200,000 SAR
Annual net cash flow50,000 SAR
Payback period = 200,000 ÷ 50,0004 years
Formula: Investment cost ÷ annual net cash flow
Don't confuse it with
Operating budgetThe operating budget covers the current year's revenues and expenses, while the capital budget covers assets that serve for many years.