Question

What are the steps of Capital Budgeting process?

Answer 1

Solution. An organization operating in today's competitive economic market needs to incorporate capital budgeting process in order to evaluate returns on investment in order to eliminate loss in future.

Steps involved in Capital budgeting are enlisted down:

1. Project or investment identification and generate proposal at all departments of an organization for investment and evaluate to select the most profitable course of action.

2. Project or investment screening and evaluation involves maximization of shareholder's wealth by selecting the most profitable project or decision as an organization faces capital restriction. This step encompasses forecasting cash flows to eliminate risky and uncertain decisions and to select one which aligns with organization's pre-determined objective.

3. Project or investment selection of the most appropriate and profitable proposal through any process based on its scope and size of organization or may incorporate capital rationing of ranking projects in order to meet its objective and finance personnel prepares capital budget.

4. Capital budgeting and apportionment of funds from selected sources are invested and the proposals or investment's process dimensions are monitored closely by the organization and performance is rated by comparing actual results with that of set standard.