Capital Budgeting

Capital budgeting is also known as the investment appraisal. Capital budgeting is a tool in financial management. It is required that a manager knows how to plan the investments of the company, particularly the company's long term investments. Capital budgeting would include the plans for the machinery (new and replacements), new plants and products, research and development and other projects that the company intends to go into. The procedure that involves the planning and the evaluation of the projects are all included in capital budgeting. It is the process by which a manager or a businessman determines if the project or investment will increase the value of the shareholder. The cash outflows and inflows of the project are determined to assess the rate of return of a given project.

Different techniques may be used in capital budgeting. Some of the most popular techniques in investment appraisal are net present value, internal rate of return, equivalent annuity, profitability index and the modified internal rate of return. The mentioned techniques would involve cash flow in increments to the projects. There are also other techniques that are used, which involve accounting earnings and accounting rules. These techniques in capital budgeting are the return on investment and the accounting rate of return. It is interesting to note that most economist believe that using these accounting techniques in capital budgeting is improper. There are also simplified and hybrid techniques that are being used in capital budgeting. Two of these methods are the payback period and the discounted payback period.