Capital Budgeting

Capital budgeting (or investment appraisals) are the planning processes used to determine a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects.
Many formal methods are used in capital budgeting, including discounted cash flow techniques such as net present value, internal rate of return, Modified Internal Rate of Return and equivalent annuity method, using the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.