Question

List and explain steps involved in Capital Budgeting process.

Answer 1

The steps involved in the capital budgeting process :

• Identify the available opportunities : the business needs to identify opportunities which can help it to expand manufacturing capacities and sales, which can be in the form of a new manufacturing site or the launch of a new product.  So, the business needs to find which investment opportunity is best suited for them to fulfill their objectives. So, the senior management helps identify the potential opportunities which can lead to expansion of sales in the future.
• Screening of the investment proposals : Once the management decides on the opportunities available based upon their feasibility, the opportunities are screened down for a further analysis between them,
• Evaluation of the investment proposals : Once, the investment proposals are screened down, they are evaluated on the basis of the future cash flows that is to be generated and using capital budgeting tools like NPV, Payback period, discounted payback period . With the help of these tolls the best investment proposal is chosen by the management.
• The monitoring of performance : Once, the proposal is selected, it is monitored and if any issued with cash flows the project is halted in the initial stages itself.
• Feedback stage : The last step in the capital budgeting process is the feedback of the investment proposal. Weather the project is generating sufficient revenues as expected or not and weather the project should be continued further or stalled immediately.