Capital budgeting is the process of evaluating commercial worthiness of a project or investment in a major venture such as purchase or overhaul of plant & machinery, product research & development, new product launch, etc.
Capital budgeting is a very critical process before undertaking any new project since a significant amount of investment is included. Moreover, the impact of the failure of a long term project is much more pervasive than failure in short term projects.
Various techniques are used in capital budgeting such as:
- Accounting rate of return
- Net Present Value (NPV)
- Payback Period
- Internal rate of return (IRR)
- Equivalent annual cost