Article

Capital Budgeting
December 03 , 2012

A business might come across many promising projects that can enhance its cash flows and increase value for its owners. However since available capital to finance a project is limited businesses must evaluate projects and select only those that optimize results within a given time frame. Capital budgeting is the process by which firms appraise capital budgeting projects. These projects or investments are long term ones and expected to bring in cash flows for many years. Examples are new plant and machinery, R&D project and new product launch.

Popular capital budgeting methods are Payback period, Net present value (NPV), Internal rate of return (IRR) and Modified IRR (MIRR). Many of the commonly used capital budgeting techniques compare cash outflows with projected cash inflows from the investment to determine whether returns would be above a certain threshold limit.

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