Capital Budgeting – The Tools for Project Evaluation

As the objective of capital budgeting is to add values to the wealth of an owner of a business, capital budgeting primarily insists on the recovery of investments made in the projects. To improve the owner's wealth, it is important to evaluate and identify profitable projects using some evaluation tools. Concerning the project evaluation, there are traditional and non-traditional tools in application to evaluate the projects in finance and financial management. In this context, this paper illustrates the project evaluation techniques contextually with specific exhibits as examples to make the reader to understand them. There are two primary evaluation techniques: (1) Traditional Methods and (2) Non-traditional methods that incorporate time value of money in the evaluation process. This book fundamentally encompasses the traditional methods of namely Payback Period (PBP) and Accounting Rate of Return (ARR), and the non-traditional methods of Net Present Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), Profitability Index (PI) or Cost-Benefit Ratio (CBR), Discounted (modified) Payback Period (DPBP or MPBP) and Time-adjusted Discounting Method (TADM). To facilitate the explanations and understanding the project evaluation methods, appropriate exhibits are illustrated from a reader’s point of view.