because it's quick and can give managers a "back of the napkin" understanding

Capital Budgeting
Capital budgeting is the process in which a business determines and evaluates
potential large expenses or investments. These expenditures and investments
include projects such as building a new plant or investing in a long-term
venture. Often, a company assesses a prospective project's lifetime cash
inflows and outflows to determine whether the potential returns generated
meet a sufficient target benchmark, also known as "investment appraisal."
Capital Budgeting with Throughput Analysis
One measures throughput as the amount of material passing through a
system. Throughput analysis is the most complicated form of capital
budgeting analysis, but is also the most accurate in helping managers decide
which projects to pursue. Under this method, the entire company is a single,
profit-generating system.
The analysis assumes that nearly all costs in the system are operating
expenses, that a company needs to maximize the throughput of the entire
system to pay for expenses, and that the way to maximize profits is to
maximize the throughput passing through a bottleneck operation. A
bottleneck is the resource in the system that requires the longest time in
operations. This means that managers should always place higher
consideration on capital budgeting projects that impact and increase
throughput passing though the bottleneck.
of the efficacy of a project or group of projects. This analysis calculates how
long it will take to recoup the investment of a project. One can identify the
payback period by dividing the initial investment by the average yearly cash
inflow.
There are a number of methods commonly used to evaluate fixed assets under
a formal capital budgeting system. The more important ones are:
The Importance of Capital Budgeting
The amount of cash involved in a fixed asset investment may be so large that
it could lead to the bankruptcy of a firm if the investment fails. Consequently,
capital budgeting is a mandatory activity for larger fixed asset proposals. This
is less of an issue for smaller investments; in these latter cases, it is better to
streamline the capital budgeting process substantially, so that the focus is
more on getting the investments made as expeditiously as possible; by doing
so, the operations of profit centers are not hindered by the analysis of their
fixed asset proposals.
Capital Budgeting Methods
 Net Present Value
 Payback Rule
 Average Accounting Return
 Internal rate of Return

Capital Budgeting Using DCF Analysis

DCF analysis is similar or the same to NPV analysis in that it looks at the initial
cash outflow needed to fund a project, the mix of cash inflows in the form of
revenue, and other future outflows in the form of maintenance and other
costs. These costs, save for the initial outflow, are discounted back to the
present date. The resulting number of the DCF analysis is the NPV. Projects
with the highest NPV should rank over others unless one or more are mutually
exclusive.

The Most Simple Form of Capital Budgeting

Payback analysis is the simplest form of capital budgeting analysis and is

therefore the least accurate. However, managers still use this method