Capital budgeting, also known as capital investment appraisal or investment appraisal, is the process by which an organization evaluates different investment projects to determine which is likely to provide the highest financial return.
Capital rationing occurs when managers have insufficient funds to invest in all projects with a positive net present value (NPV). It requires prioritization of projects to maximize NPV. It is classified into soft and hard capital rationing depending on whether constraints are self-imposed or external, respectively.
Discounted Cash Flow (DCF) is a financial valuation method used to appraise investments, architectures in capital budgeting, and other expenditure decisions by analyzing the predicted cash flow stream (incomes and outflows) and discounting them to present values using a specific cost of capital or hurdle rate.
Financial appraisal refers to the use of financial evaluation techniques to determine the preferred option among various alternatives, often employing discounted cash flow methods, ratio analysis, profitability index, or payback period.
The Profitability Index is a financial metric used to evaluate the profitability of an investment or project, calculated by dividing the present value of future expected cash flows by the initial investment.
A financial metric used in discounted cash flow analysis to rank potential projects based on their profitability.
