Question

(a) Identify and briefly describe two phases of the capital budgeting process. (b) Would saving time by skipping one of these phases in the capital budgeting process make sense financially?

Answer 1

As you have mentioned “Capital Budgeting Process”, I will say there are 5 phases in Capital Budgeting Process. They are

1. Planning
2. Analysis
3. Selection
4. Implementation
5. Review

Planning

In planning stage pre-screening of proposals are done. Different strategies are made to identify opportunities in the market for investment. For an example, Infosys ltd. Requires a super computer for its ongoing artificial intelligence research works. Now in planning stage, board and management will make strategy which is essential to grab the best opportunity available in the market.

Analysis

In analysis stage a detail analysis is conducted. In this stage what are the requirements, what are the risks, what are the rewards, what are the impact, approximate costs, useful life, etc. are monitored and documented.

Example: Management of Infosys ltd will try to find out the best super computers available in market their features, what Infosys wants it super computer to do, how it will do, what are the financial impact of the company etc. will be analyzed and documented.

Selection

In this phase company start to evaluate different proposals and their financial feasibility. Company may ask for tenders and quotes from super computer makers and evaluate them by using NPV and IRR methods. If the company find it “wroth investing” then company will move to next phase, otherwise company will quit the project.

Implementation

The implementation phase involves the setting up and finally implementing the project. The equipment and plants if any required will be bought and proper training to end users will be given so that the project can be implemented in proper way. This phase is basically requiring lower level management support so that the function is performed in a smooth manner.

Review

In this phase company will review whether the project is fulfilling its desired objectives or not. A thorough review is conducted by experts and any deviation are documented. These are informed to management so that proper action can be taken in time. Performance review should be done periodically to compare the actual performance with the projected performance.

No, all these processes are important and dependent on each other. It is not advisable to skip any phase. Even if financially it is not viable as a small mistake in capital budgeting decision will cost a hefty amount to the company. So company should follow all the phases rigorously and take decisions according to that.