The process through which investors assess the worth of a possible investment project is known as capital budgeting. The payback period (PB), the internal rate of return (IRR), and the net present value are the three methods of project selection that are used the most often (NPV).
This is further explained below.
Generally, In the context of corporate finance, capital budgeting and investment evaluation refer to the planning process that is used to assess whether or not a company should make long-term expenditures such as purchasing new equipment or replacing existing machinery.
The process of capital budgeting includes the phases of identifying the prospective projects, analyzing them, choosing and executing the projects, and lastly reviewing the performance of the projects in light of potential future considerations.
In conclusion, Investors use capital budgeting to estimate how much a proposed investment project is worth. Payback period (PB), internal rate of return (IRR), and net present value are the three most popular ways to choose between projects (NPV).
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