Capital budgeting can also be considered as a managerial tool required for managing the collected capital of the business. The core responsibility of the financial managers is to choose the investments in a way so as to generate good rates of return. Hence, this is the job of the financial manager to decide whether a particular investment should be included in the portfolio or not.
This entire task is called capital budgeting. The financial manager needs to have a sound knowledge on evaluating, selecting and comparing projects.
The concept of capital budgeting gives immense importance on the project selection of a business. This is because the business is experiencing capital expenditure on every project that is generating cash flow in the future. If the capital expenditure is large, proper capital budgeting should be used to ensure future earning of the business.
Some of the major techniques of capital budgeting are:
- Net Present Value
- Internal Rate of Return
- Profitability Index
- Equivalent Annuity
- Modified Internal Rate of Return