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.