What is Capital Budgeting?
Capital budgeting is the process of evaluating and selecting long-term investments such as new plants, equipment, products, or acquisitions. It uses techniques like NPV, IRR, payback, and DCF.
How It Works
- Forecast project cash flows over the investment horizon.
- Discount at the cost of capital to compute NPV and IRR.
- Approve projects that beat the hurdle rate.
Saudi Context
Saudi giga-project owners — PIF, Aramco, NEOM — apply formal capital-budgeting frameworks with hurdle rates aligned to Vision 2030 strategic priorities.
Example
A Saudi factory expansion costs SAR 20 million and is expected to generate SAR 6 million per year for 5 years. At a 10% discount rate, NPV is about SAR 2.7 million, so the project is approved.