- 2078 Bhadra · 3 marks
Describe capital budgeting process
Short answer
The capital budgeting process includes identification of investment opportunities, screening, cash flow estimation, evaluation (payback, ARR, NPV, IRR, PI), selection and approval, financing and implementation, monitoring and control, and post-audit. It repeats for each proposal and must align with strategy and available funds.
Describe the capital budgeting process.
Capital budgeting is the process of planning, evaluating and selecting long-term investment projects whose benefits come over several years (such as a new plant, road or building), by comparing the cash outlay with the expected future returns.
The capital budgeting process:
- Identification of investment opportunities: generate project ideas (new product, replacement, expansion).
- Screening and preliminary evaluation: reject unsuitable ideas.
- Estimation of cash flows: estimate initial cost, annual inflows, outflows and salvage value.
- Evaluation: apply techniques (payback, ARR, NPV, IRR, PI).
- Selection and approval: choose the best project(s) under budget; top management approves.
- Financing and implementation: arrange funds, plan and execute.
- Monitoring and control: compare actual with forecast and take action.
- Post-audit (review): check the results and learn.
The process is repeated for each investment proposal, and the final choice must be consistent with the firm's strategy and available funds.
✓ Answer checked by Claude Opus 5.5 (high effort)
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