Question

Capital budgeting decisions are among the most important decisions facing business entities. Suggest specific milestones needed to evaluate the performance of capital projects and suggest some ways to hold managers accountable for spending overruns. Recommend when capital projects should be abandoned due to subsequent cost overruns. Support your position.

Answer 1

Captial Budgetting involves planning for large outlays of fund for investment projects. Generally those project will be more complex than budgeted.

Part Way through the process there will be Milestone Evaluation Stage as well as at Final Stage there will be Final Ealuation. This gives an opportunity to evaluate or assess the acheivement of targeted goals and Related cost and Quality of project.

As a part of this Evaluation firstly the manager asses capital project's original purpose or intended outcome only after that other set of milestones are done.

A project is only initiated after proper evaluating capital requirement and Return using methods such as NPV analysis , IRR method and ROI kind of calculation cost and quality ways.So Milestone at point of time through way project is a Critical Path way analysis of acheiving these targets.

Examples of specific MileStone will be like Deliverables set upon intiation of project that meet deadlines. Deliverables might not be the final product.

Another Type of Milestone can be Some Checkpoint and Percentages, example for where we makes use of it is in reenue recognistion.

Prioritizing Tasks will be an important one among them because project to be undertaken in proper order with strong base.

The managers should be held accountable for cost related to the project they are the one who has an hand on. At the same time manaer should not be demotivated as they play major role in the Success of an organisation.

Setting Expectations will the the best method to make managers accountable so it is easy to asses whether they stick with those targeted.

Goals are only measurable when quantified into some factors. So measuring progress of manager should be on proper basis.

Performance related Rewards will motivate Managers to acheive those expectations.

If the Project Fails to meet Targets or Milestones set on assessing through the process of Project. And if a huge variation is found, It is advisible to reverse project evaluations conducted at the begining of project such as Reversed NP calculations and Things to arrive at a conclusion wheather to Terminate the Projet or Not.

If the reversed Analysis along with current assessment shows a failure of meeting expectation it is better to abandon as cost Overruns benefit to be attained. Also Consider for related projects if this project is innevitable for another positive project may still continue this project unless orgasation objective will be lapsed.