Capital Budgeting

1. The evaluation and making of long-term investment decisions. Capital budgeting decisions are decisions that involve an outlay or outlays now (or soon) in order to obtain some return in the future. Capital budgeting decisions are often made for individual projects to determine if those projects will be undertaken. Capital investments that are independent should be made if they add value to a firm; otherwise, they should be rejected. Four common approaches to capital budgeting decisions are the payback method, the discounted payback method, the net present value method, and the internal rate of return method. Sometimes, the accounting rate of return method is also used. See also payback method and discounted payback method and net present value method and internal rate of return method.