Capital Budgeting Decisions
Many formal methods are used in capital budgeting, including the techniques such as * Accounting rate of return * Payback period * Net present value * Profitability index * Internal rate of return * Modified internal rate of return * Equivalent annuity * Real options valuation
These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period. Contents [hide] * 1 Net present value * 2 Capital Budgeting Definition * 3 Internal rate of return * 4 Equivalent annuity method * 5 Real options * 6 Ranked Projects * 7 Funding Sources * 8 Need For Capital Budgeting * 9 External links and references |
Net present value
Main article: Net present value
Capital Budgeting Definition
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project 's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Also known as "investment appraisal."
Capital budgeting is a long-term economics decision making. Each potential project 's value should be estimated using a discounted cash flow (DCF) valuation, to find its net present value (NPV). (First applied to Corporate Finance by Joel Dean in