Capital budgeting refers to the process in which a firm determines whether a task or investment will probably be worth pursuing. More often than not, the process will involve a long-term assessment of the cash inflow and outflows to ascertain if the profits generated meet up with the investment appraisal. The most common methods used are the world wide web present value (NPV) where evaluation of the task is based on the amount by which its value is maximized. Other methods or tools found in decision making include: the internal rate of come back (IRR), a version of the IRR known as the modified interior rate of return (MIRR), the discounted payback period (DPB), a profitability index method (PI) and the original payback method. Whatever the demerits provided by each, most businesses or financial managers tend to stick to a certain method of capital budgeting.
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