Capital Budgeting

Abstract

Capital budgeting is really about how the firm decides which fixed assets are a ‘worthwhile’ investment or which alternative investments are the most profitable or financially attractive. There are four techniques commonly used:

• i The average rate of return

• ii Payback

• iii Net present value (NPV)

• iv Percentage yield or internal rate of return (IRR)

None of these methods needs to be used in isolation. Quite often management will evaluate investment projects using two or more of the above investment appraisal techniques.