Capital Budgeting looks at what assets we want on the firm's balance sheet (or our own balance sheet!) So in essence we are looking for projects (in other words assets) that make us better off. My favorite method to use (by far) is NPV. But there are many other methods such as Payback, IRR, accounting rates of returns. All of these (and others) are used and you SHOULD know them, but if you only have time for one, MAKE IT NPV! I will make a second toolset for more advanced capital budgeting topics (real options, effective annual cost method, as well as behavioral biases that affect capital budgeting.
Here is a class presentation I did a few years ago to introduce capital budgeting. Not much has changed since then, so I will use it :) This is meant as an introduction and it sets the stage for a more rigorous look at Capital Budgeting. In this lesson we see where it fits and what it is (trying to determine what assets the firm should have on its Balance Sheet)
Edit Remove Movea well done 2 min video on the intuition behind NPV caluculations
Edit Remove MoveLet's be honest, you will use spreadsheets to do capital budgeting almost all the time. So let's start with it. This is a good presentation of how to calculate NPV and IRR. In their words "Describes how to calculate net present value (NPV) and internal rate of return (IRR) in excel with a simple example. Download the excel file here: http://codible.com/pages/38"
Edit Remove MoveI will NOT get involved with calculator descriptions in class, but here is a video that will help you if you are using a financial calculator (as in for tests ;) ) #NPV #Calculator Uploaded by mssuprof on 2009-02-17.
Edit Remove MoveMost of the time the NPV rule (accept if positive) and the IRR rule (accept if greater than the cost of capital) will give you the same decision. However, that is not always true. One of these times is when you are dealing with mutually exclusive projects with different sizes (called scale differences). When there is any doubt, you should go with NPV.
Edit Remove MoveHere is a google spreadsheet I put together to show NPV, IRR, MIRR, Payback, Discounted Payback, Profitability Index, and average accounting returns
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