A better description is strategic asset allocation, that is, how should the company's resources be allocated. Types of projects Projects can encompass almost anything that involves allocation of significant corporate resources. These may include which product or service to offer, whether to buy a new machine, or whether or not to buy a company. Referring back to our picture of the firm, capital budgeting has to do with what assets to put in the circle. We want to distinguish real assets from financial assets.
Real assets create cash flows for the firm.
Financial assets, such as stocks and bonds, are claims on the cash flows which are generated by the real assets. Investment criteria Investment criteria are the methods or procedures by which we decide whether to accept or reject a particular project. We first estimate the future cash flows associated with a project, and then discount those cash flows back to present values. The difference between the present value of the inflows and the present value of the outflows is called Net Present Value, or NPV for short. NPV also represents value added .