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The process and techniques used in the planning of investment decisions whether long term or short term like whether to replace or repair the machine or to buy a machine or to take it in a lease. The goal is to make a decision that will increase the company value and the share holder’s wealth. It gives insight to the decision makers to evaluate the value of making an investment. The need for the subject arises out of a number of uncertainties in the business environment experienced by every entity. The following are the factors influencing Capital Budgeting decisions:
a. Net Present Value (NPV): The most common and favoured technique of Capital Budgeting used in the decision making of investment. It follows the discounted cash flow method. The expected future cash flows are converted into the present value using a discount rate and are compared with the present value of cash outflow.
b. Equivalent Annuity Method (EAM): Projects with varying lifespan cannot be compared using discounted cash flow approach. In such cases, EAM is opted by entities to take the investment decisions.
c. Ranked Projects: The chosen projects following the NPV or EAM method is then ranked. This is done when there is a limitation of available capital for investing. In such cases, all investment options could not be explored. The projects are ranked and the project with the highest rank is chosen.
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