Complete Capital Budgeting & Variance Analysis Master Class!: Shape The Future Of Business, Drive Sustainable Growth, And Master The Art Of Strategic Capital Budgeting Today

Capital budgeting decisions involve planning for projects and future cash flows extending more than one year into the future. The common example of a capital budgeting decision is the decision to purchase a large piece of equipment that will impact future cash flow for multiple years.

The typical format of a capital budgeting decision often includes a cash out flow at a time period zero, resulting in cash inflows, or reduced outflows due to increased efficiencies, over multiple years.

Because capital budgeting decisions impact cash flows for multiple years, time value of money concepts are used, including present value of one calculation and present value of annuity calculations.

The primary tools used in capital budgeting decisions are the net present value calculation (NPV) and the internal rate of return calculation (IRR). Both of these tools utilize time value of money concepts, and we will spend a lot of time with them.

We will also discuss the payback period calculation and the modified internal rate of return or (MIRR).