 By capital budgeting, we mean the process that a company uses in order to determine the worth of its capital projects. These projects are so much larger and significant that the cash outlets related to these projects may vary from hundreds of millions in amount. Now a question arises, why is it necessary for a financial analyst to understand capital budgeting? The answer is that capital budgeting is used as an evaluation tool in order to evaluate the financial worth of a capital project who has an economic life beyond one year. These capital projects are so much larger in amount and in life that they become part of financial assets at the balance sheet of any corporate firm. The decisions regarding these capital projects are so much critical that these decisions may form the life and future of a corporate entity. The capital budgeting decisions are even so much critical that their reversal is not possible at a lower cost, so any mistake in implementation and planning of these capital projects may be costly to the firm. The principles used in capital budgeting are equally applicable to investments in working capital, leasing projects, and mergers and acquisition transactions. The valuation principles used in capital budgeting are similar to the principles used in evaluation of securities and portfolio management. Even the innovations used in the valuation of securities and portfolio management are equally applicable to the valuation of capital projects while doing capital budgeting analysis. Another important implication for capital budgeting is that through capital budgeting, shareholder value can be maximized. Capital budgeting process involves certain stages. The first stage is the generation of ideas. Ideas may come from everywhere, from top management, from lower management, from a departmental manager, or from a functional area of the corporate firm. Even these business ideas may come from outside the company. The next stage is the individual proposals analysis. It involves the screening of individual ideas and determining the financial worth of these ideas. At this stage, the involvement of quantitative principles and models of capital budgeting are applied. At this stage, the profitability and solvency of the intended capital project is viably and feasibly checked by the financial analyst. The third stage is the planning the capital budgeting. At planning stage, the implementation of the plan starts. At this stage, the various departments of the organization are coordinated in order to implement the capital budgeting plan. The policy resources are given to them and a coordinated effort is put in order to implement the proposed capital project. The final stage is the monitoring and post-auditing, but at monitoring stage, the work in progress on the intended capital project is undertaken and our monitoring is conducted in order to ensure the smooth completion of the project. By post-auditing, we mean the audit once the project is completed, then the actual outcome of the project is compared with the expected outcome and the difference in terms of variances is analyzed. Then certain measures are taken in order to create those measures, use of capital budgeting where we can use the capital budgeting techniques. The first usage is the replacement projects. These are the projects that are undertaken in order to maintain a productivity or profitability of a business concern. In these projects, an existing plant is replaced with a newer one. In such type of projects, uncertainties are relatively lower. The second is the expansion projects. These expansions are aimed in order to expand the scale of the business. This expansion may be in terms of level or scale of business operations, may be in order to get into newer line of business. So these types of projects are riskier than the replacement projects because uncertainties in such type of expansion projects are much more than the replacement projects. Third usage is the new product and services. The introduction of new product and services for the current market or for the newer market is much more critical for the future of any corporate firm. In these types of projects, uncertainties are even more than them, expansion projects. The next usage is the regulatory, safety and environmental projects. These are the projects that are required by government regulators to start, implement and maintain. These may be for safety of the workers, for safety of the surrounding people, for safety of the environment. An important feature of such type of projects is that these projects although involve a significant of cash outflow, but such type of projects may not yield any cash inflows as a result. So the company has to decide whether is it viable to implement and maintain such type of projects or it is more feasible to withdraw the running project, a running setup for which such type of environmental and safety project is required by the government authorities.