Capital budgeting is a required managerial tool.

One duty of a financial manager is to choose

investments with satisfactory cash flows and
rates of return. Therefore, a financial manager
must be able to decide whether an investment is
worth undertaking and be able to choose intelligently
between two or more alternatives. To do this,a
sound procedure to evaluate, compare, and select
projects is needed. This procedure is called
capital budgeting.
In the form of either debt or equity, capital is a
very limited resource. There is a limit to the
volume of credit that the banking system can
create in the economy. Commercial banks and other
lending institutions have limited deposits from
which they can lend money to individuals, corporations,
and governments. In reality, any firm has limited
borrowing resources that should be allocated among
the best investment alternatives.
Faced with limited sources of capital, management
should carefully decide whether a particular project
is economically acceptable. In the case of more than
one project, management must identify the projects
that will contribute most to profits and, consequently,
to the value (or wealth) of the firm. This, in essence,
is the basis of capital budgeting.
Capital budgeting is investment decision-making as to
whether a project is worth undertaking. Capital budgeting
is basically concerned with the justification of capital
expenditures. Current expenditures are short-term and
are completely written off in the same year that expenses
occur. Capital expenditures are long-term and are amortized
over a period of years
Capital budgeting is a continuous process and it is carried
out by different functional areas of management such as
production, marketing, engineering, financial management etc.
BASIC FEATURES OF CAPITAL BUDGETING
Capital budgeting decisions have long-term implications.
These decisions involve substantial commitment of funds.
These decisions are irreversible and require analysis of minute details.
These decisions determine and affect the future growth of the firm.
Difficulties
Uncertainty: the future business success is today s investment
decision.The future in the real world is never known with certainty.
Difficult to measure in quantitative terms: Even if benefits are
certain, some might be difficult to measure in quantitative terms.
Time Element: the problem of phasing properly the availability of
capital assets in order to have them come on stream at the correct time.

The following are the Evaluation methods:-

Payback period(PB)
Post-payback profitability(PPP)
Average Rate of Return(ARR)
Minimum Unit Cost
Net Present value(NPV)
Profitability Index(PI)
Internal Rate of Return(IRR)
Net Terminal Value(NTV)
Discounted payback period(DPP)
Cut-off rate