Capital allocation is the process used to analyze projects and decide which ones should or should not be included in the company’s capital budget (plan for spending money on growth and sustaining current operations). This chapter gives you the tools to make these decisions based upon potential growth and profitability. After the analysis has been performed, the capital budget itself outlines the planned expenditures on capital assets. The capital allocation process is important as it outlines the long-term investment strategy of the company.
The tools that we will describe in this chapter are: