Top Capital Budgeting Techniques & Real-Life Examples Sections Covered Capital Budgeting Techniques & Real-Life Examples Comparison Table of Capital Budgeting Techniques (With Full Forms) Advantages & Disadvantages of Capital Budgeting Methods Why Capital Budgeting Is Important in India Build a Global Finance Career with NorthStar Academy Conclusion Schedule a call Every business — from a local tea stall to big corporates like Reliance or Tata — faces one key question: “Where should we invest our money?” This is where Capital Budgeting comes in. It helps decide which long-term projects will be profitable in the future. In simple words, capital budgeting means deciding how to spend money on long-term assets like machinery, buildings, or new products to earn the best returns. Let’s understand the top capital budgeting techniques with real-life Indian examples, explained so simply that even a school student can grasp them! Capital Budgeting Techniques & Real-Life Examples 1. Payback Period MethodMeaning The Payback Period tells how long it takes to recover the money invested in a project. It’s one of the simplest methods used by small businesses.Formula Payback Period=Initial InvestmentAnnual Cash Inflow\text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Cash Inflow}}Payback Period=Annual Cash InflowInitial InvestmentExample A tea café in Delhi invests ₹5,00,000 in a new outlet. If the café earns ₹1,00,000 per year: ₹5,00,000÷₹1,00,000=5 years₹5,00,000 ÷ ₹1,00,000 = 5 \text{ years}₹5,00,000÷₹1,00,000=5 years So, the café will recover its investment in 5 years. ✅ Pros: Simple and easy to use ❌ Cons: Ignores time value of money and post-payback profits2. Net Present Value (NPV) MethodMeaning NPV (Net Present Value) considers the time value of money, meaning that ₹1 today is more valuable than ₹1 tomorrow. It shows the project’s total profitability in today’s value.Formula NPV=Present Value of Cash Inflows−Initial Investment\text{NPV} = \text{Present Value of Cash Inflows} - \text{Initial Investment}NPV=Present Value of Cash Inflows−Initial InvestmentExample A solar panel company in Mumbai invests ₹10,00,000 in a project expected to earn ₹3,00,000 per year for 5 years. At a 10% discount rate, the total present value is ₹11,37,900. NPV=₹11,37,900−₹10,00,000=₹1,37,900NPV = ₹11,37,900 - ₹10,00,000 = ₹1,37,900NPV=₹11,37,900−₹10,00,000=₹1,37,900 Since NPV is positive, the project is profitable. ✅ Pros: Considers time value of money ❌ Cons: Needs estimation of future cash flows and discount rate3. Internal Rate of Return (IRR)Meaning IRR (Internal Rate of Return) is the rate at which the NPV becomes zero. It helps compare different investments.Example Suppose Infosys invests ₹50 lakh in a new software product. If the IRR is 18% and the company’s required rate is 12%, the project is accepted, as 18% > 12%. ✅ Pros: Considers time value of money ❌ Cons: Complex to calculate manually4. Profitability Index (PI)Meaning PI (Profitability Index) measures the ratio between the present value of future cash inflows and the initial investment.Formula PI=Present Value of Future Cash InflowsInitial InvestmentPI = \frac{\text{Present Value of Future Cash Inflows}}{\text{Initial Investment}}PI=Initial InvestmentPresent Value of Future Cash InflowsExample A startup in Bengaluru invests ₹2,00,000 with an expected return of ₹2,40,000 (present value). PI=₹2,40,000÷₹2,00,000=1.2PI = ₹2,40,000 ÷ ₹2,00,000 = 1.2PI=₹2,40,000÷₹2,00,000=1.2 Since PI > 1, the project is profitable.5. Accounting Rate of Return (ARR)Meaning ARR (Accounting Rate of Return) calculates the average annual accounting profit as a percentage of the initial investment.Formula ARR=Average Annual ProfitInitial Investment×100ARR = \frac{\text{Average Annual Profit}}{\text{Initial Investment}} × 100ARR=Initial InvestmentAverage Annual Profit×100Example A garment factory in Tirupur invests ₹10 lakh and earns ₹2 lakh yearly. ARR=2,00,00010,00,000×100=20%ARR = \frac{2,00,000}{10,00,000} × 100 = 20%ARR=10,00,0002,00,000×100=20% If the company’s expected rate is 15%, this project is worth investing in6. Discounted Payback Period (DPB)Meaning The Discounted Payback Period considers the time value of money, unlike the regular Payback method. It gives a more realistic recovery period.Example A real estate developer in Pune invests ₹10 crore. By discounting cash flows, the recovery time is 6 years instead of 5, making the result more accurate.7. Modified Internal Rate of Return (MIRR)Meaning MIRR (Modified Internal Rate of Return) assumes that cash inflows are reinvested at the company’s cost of capital, giving a more realistic result than IRR.Example A solar energy company in Gujarat invests ₹20 lakh. If IRR = 17% but MIRR = 15%, the MIRR gives a clearer, more practical picture of returns. Latest UpdatesEnrolled Agents Frequently Asked QuestionsEnrolled Agent (EA) Jobs Opportunities and Career ScopeTop 5 Reasons Why You Should Consider Becoming an Enrolled AgentCan I Pursue Enrolled Agent Course in India? Comparison Table of Capital Budgeting Techniques (With Full Forms) Method (Full Form)Best ForDecision RulePayback Period (PB)Small businessesShorter = BetterNet Present Value (NPV)Long-term projectsPositive NPV = AcceptInternal Rate of Return (IRR)Investment comparisonHigher IRR = BetterProfitability Index (PI)Budget rankingPI > 1 = AcceptAccounting Rate of Return (ARR)Simple analysisHigher ARR = BetterDiscounted Payback Period (DPB)Accurate recoveryShorter = BetterModified Internal Rate of Return (MIRR)Realistic reinvestmentHigher MIRR = BetterLatest UpdatesSuccess Stories: CA Professionals Journey to becoming a CPAThe Best CPA Comprehensive GuideUS CPA Eligibility in India - Step-by-Step GuideCPA Canada Requirements - How to pursue CPA Canada after BCom Advantages & Disadvantages of Capital Budgeting Methods MethodAdvantagesDisadvantagesPayback PeriodEasy to use and understandIgnores time value of moneyNPVConsiders profitability & time valueRequires discount rate estimationIRRHelps compare multiple projectsDifficult to calculate manuallyPIUseful for ranking projectsNeeds accurate PV of inflowsARRBased on accounting dataIgnores cash flow and time valueDPBConsiders time valueComplex than simple paybackMIRRRealistic reinvestment rateRequires advanced calculation Latest UpdatesIs US CPA Harder Than CMA or ACCA? A Complete Guide for Indian StudentsACCA AI Skills 2025: Future-Proof Your Career in Finance & AccountingHow ACCA Helps Students Land International Finance Jobs in 2025ACCA vs ACA: Career Scope, Salary & Global Recognition Why Capital Budgeting Is Important in India Capital budgeting helps Indian businesses:Choose profitable and sustainable projectsReduce financial risksImprove strategic planningSupport Make in India and startup growthWhether you run a local café, a manufacturing unit, or a tech startup, understanding these methods helps make smarter investment choices. Build a Global Finance Career with NorthStar Academy To truly master capital budgeting and financial management, you need the right global certification.That’s where NorthStar Academy (NSA) comes in — India’s leading institute for international accounting courses.Top Courses Offered by NorthStar AcademyCourseRecognitionIdeal ForDurationCMA USA (Certified Management Accountant)Recognised by IMA, USAFinance & Management aspirants6–9 monthsCPA USA (Certified Public Accountant)Recognised by AICPA, USAAuditing & Accounting professionals12–18 monthsEA (Enrolled Agent)Authorised by IRS, USATax & Compliance experts12 monthsACCA (Association of Chartered Certified Accountants)UK-based, globally acceptedCommerce graduates & CA aspirants2–3 yearsAt NorthStar Academy, you get: ✅ Expert faculty with 10+ years of experience ✅ Live + recorded classes ✅ Exclusive Becker & Gleim study material ✅ 100% placement assistance after certificationStart your global accounting journey today with NorthStar Academy. 📞 WhatsApp “Hi” to +91 8147470505 for Expert Guidance & Free Counselling! Read MoreBCom with ACCA Qualification and Global ScopeACCA Salary in Dubai and Job OpportunitiesACCA Salary in India and Other Countries Conclusion Capital budgeting helps every investor — from small shop owners to top financial analysts — make wise financial decisions. Techniques like NPV, IRR, and Payback Period show how to invest smartly, earn better returns, and reduce risk. Whether you want to apply this knowledge in your business or career, learning professional finance skills through CMA USA, CPA USA, EA, or ACCA can open global opportunities for you. The CA average salary in India ranges from ₹6 LPA for freshers to ₹25+ LPA for senior professionals, depending on specialization, company, and city. If you’re a CA aiming for global exposure and higher pay, certifications like CMA USA or CPA USA can elevate your profile dramatically.💬 Want to explore your global career options?👉 WhatsApp “Hi” to +91 8147470505 for personalized guidance from NorthStar Academy experts. Frequently Asked Questions What is capital budgeting in simple words? Capital budgeting means deciding where to invest money for long-term benefits, such as opening a new branch or buying new equipment. Which capital budgeting method is best for beginners? The Payback Period and Net Present Value (NPV) methods are easiest and most commonly used. What is an example of capital budgeting in India? A Zomato outlet investing ₹50 lakh to open a new kitchen is a real-life example of a capital budgeting decision. What are the main techniques of capital budgeting? The main techniques are Payback Period, NPV, IRR, PI, ARR, DPB Why is NPV considered the best method? Because NPV includes the time value of money, helping calculate real profitability and better investment comparison.Ready to build your global finance career?WhatsApp “Hi” to +91 8147470505 and talk to experts at NorthStar Academy today!
