ABSTRACT
This chapter reviews the development of capital budgeting decision-making over the past 35 years and then describe the present state of theory and practice. The investment analysis should be performed using the after-tax cash flows of each period as the inputs into the calculations. The debt flows are generally excluded from the measure of cash flows. Thus profitability measures are obtained that are independent of the method of financing. The accountant measures yearly earnings based on complex ‘accrual’ concepts. The discounted cash flow methods of evaluating the investments have now gained acceptability and are used by almost all the largest industrial firms and their use is spreading among the smaller firms. The conventional net present value method of making capital budgeting decisions takes the time-value of money into account using the firm’s cost of capital as the discount rate.
