Capital Budgeting Decisions are based on:

Capital budgeting is based on the same procedures that are used in security valuation, but with two major differences. First, stocks and bonds exist in the securities markets and investors choose from the available set. However, firms actually create capital budgeting projects, so capital budgeting involves project creation. Second, most investors have no influence over the cash flows produced by their investments, whereas corporations do have a major influence on their projects’ results. If companies execute their plans well, then capital budgeting projects will be successful, but poor execution will lead to project failures. Still, in both security analysis and capital budgeting, we forecast a set of cash flows, find the present value of those flows, and then make the investment if and only if the PV of the future expected cash flows exceeds the investment’s cost.

Capital budgeting decisions are based on many aspects. One need to be sure of ability of getting positive and sufficient returns on the capital employed. And to do this, one need to do detailed exercise of inflows and outflows along with time horizon. Practically, only positive and hefty returns are not the right answers, but one need to look at ability to implement the project, its impact on other on going business and also see the opportunity cost for such capital investment.

Thus, a good CFO or CEO need not restrict capital budgeting to mere financial analysis.