Capital Budgeting Decisions
Topics: Net present value, Internal rate of return / Pages: 7 (1706 words) / Published: Jun 11th, 2013

Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization 's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.[1]
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[edit]
Main article: Net present value
Capital Budgeting Definition[edit]
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

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