**Capital Budgeting**is the process of evaluating various projects and investment ideas based on their future net cash flow.

- An
**investment is considered viable only if it is profitable, capital budgeting**helps to find the**profitability of a project and compare two projects for the better one.** - There are
**various methods to calculate and compare the profitability of various projects**and support the Investment Decision of an organization. These methods may be used individually or two of them may be combined to get a better picture of the investment profile, the methods are as discussed below:

**Net Present Value Criteria:**Net Present Value is the difference between the initial amount of an investment and the present value of all future tax-free cash flows. If the NPV of an investment is positive, then that investment is profitable.**NPV is superior to all other available mechanisms**to help make investment decisions.**Internal Rate of Return (IRR):**IRR is the discount rate for which NPV = 0. A project is**profitable only if IRR > Required Rate of Return.****Profitability Index: Profitability Index**measures the**ratio between the present value of future cash flows to the initial investment.**A project is said to be profitable if PI > 1**Payback Period:**Payback period is the**time required to recover the original capital employed**at the beginning of the project.**Projects with a shorter payback period are preferred.****Discounted Payback Period:**Discounted Payback period is the**time required to recover the original capital employed**at the beginning of the project considering the impact of the time value of money.**Projects with shorter discounted payback periods are preferred.****Accounting Rate of Return (ARR):**ARR is the average net income expected by a project divided by the average capital cost. A project is said to be viable if**ARR > Returns Expected.**