Capital Budgeting: Theory and Practice

In today's scenario capital budgeting plays a vital role in analysing and ranking proposed projects to determine which ones deserves of an investment. In other words, capital budgeting is the process of determining which long-term projects should be undertaken. Energy-efficiency investments are typically considered part of the capital budgeting. The capital budgeting analysis recommends net present value method (NPV) that converts future costs and savings into current (that is, present) values to compare with the cost of the investment. Difficulties arise, however, when applying NPV analysis because of uncertainties associated with future values of variables used in the NPV calculations. This chapter provides an overview of traditional capital budgeting practices and net present value that applied to energy-efficiency investments.