Many business managers rarely understand the importance of detailed capital budgeting and the importance to sustain the business competitively. Capital budgeting is the decision process that managers use to identify those projects that add to the business value, and as such it is perhaps the most important task faced by managers and financial managers. The business capital budgeting decisions define its strategic direction, because moves into new products, services, or markets must be preceded by capital expenditures. Second, the result of capital budgeting decisions continue for many years, reducing flexibility. Third, poor capital budgeting can have serious financial consequences. If the business invest too much, it will incur unnecessary high depreciation and other expenses. On the other hand, if it does not invest enough, its equipment may not be sufficient modern to enable it to produce competitively.

A business growth, and even its ability to remain competitive and to survive, depends on a constant flow of ideas for new products, for ways to make existing products better, and for ways to operate at a lower cost. A well managed business will go to great lengths to encourage good capital budgeting proposals from its employees. Analysing capital expenditure proposals is not a costless operation - benefits can be gained, but analysis does have a cost. Business generally categorize projects and then analyse those in each category differently such as:

• Replacement: maintenance of business. Replacement of worn-out or damage equipment is necessary if the business wants to continue with operations.
• Replacement: cost reduction: These projects lower cost of labour, materials, and other inputs such as electricity by replacing less efficient equipment.
• Expansion of existing products or markets: Expenditure to increase output of existing products, or to expand retail outlets or distribution facilities.
• Expansion into new products:These projects involve strategic decisions that could change  the fundamental nature of the business.
• Safety projects: Expenditure necessary to comply with legislation.

In general, relative simple calculations and only a few supporting documents are required for replacement  decisions, however a more detailed analysis is required for cost reduction replacements, expansion of existing product lines, more specific for investments in new products.