| Definition |
The process of evaluating and selecting long-term investment projects or assets. |
The mix of debt, equity, and other financing sources a company uses to fund its operations and growth. |
| Objective |
To identify profitable investment opportunities that maximize shareholder value. |
To optimize the financing mix to minimize cost of capital and maximize firm value. |
| Focus |
Investment decisions related to capital expenditures like new plants, machinery, or projects. |
Financing decisions related to the proportion of debt vs equity and other liabilities. |
| Time Horizon |
Long-term, usually several years. |
Long-term, ongoing as company financing evolves. |
| Key Decisions |
Whether to accept or reject investment projects based on expected returns. |
Determining the ideal debt-to-equity ratio and financing sources. |
| Tools & Techniques |
Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Profitability Index. |
Debt ratio analysis, Weighted Average Cost of Capital (WACC), leverage analysis. |
| Impact on Financial Statements |
Results in asset additions on the balance sheet and affects future cash flows. |
Affects the capital structure portion of the balance sheet and interest expenses in income statement. |
| Risk Consideration |
Focus on project-specific risks and expected returns. |
Focus on financial risk related to debt servicing and solvency. |
| Stakeholders Involved |
Management, project teams, investors evaluating growth opportunities. |
Management, investors, creditors assessing financial stability and cost of capital. |
| Goal Alignment |
Aims to increase the company’s asset base and profitability. |
Aims to structure financing to support growth while controlling risk and cost. |
| Examples |
Deciding to invest ₹100 crore in new manufacturing equipment. |
Choosing to fund expansion with 60% equity and 40% debt. |
| Effect on Cash Flow |
Capital budgeting projects require initial outflows and generate future inflows. |
Capital structure affects cash outflows through interest and dividend payments. |
| Financial Metrics |
Project cash flows, discount rates, payback period. |
Debt-to-equity ratio, cost of debt, cost of equity, WACC. |
| Flexibility |
Project decisions are often irreversible once implemented. |
Capital structure can be adjusted over time with refinancing or issuing shares. |
| Influence on Company Value |
Good investment choices can increase firm value substantially. |
Optimal capital structure can reduce financing costs and improve valuation. |
| Relation to Growth |
Directly linked to business expansion and capacity enhancement. |
Provides the funding framework to support growth initiatives. |
| Regulatory Considerations |
May involve environmental or industry-specific approvals. |
Must comply with debt covenants and securities regulations. |
| Summary |
Capital budgeting is about selecting investment projects to grow assets and profits. |
Capital structure is about choosing the best mix of financing to support the company sustainably. |
capital budgeting vs capital structure