- 2066 Bhadra (old course) · 4 marks
Short note: Steps in capital budgeting
Short answer
Capital budgeting steps: identify investment opportunities, screen, estimate cash flows, evaluate (payback, ARR, NPV, IRR, PI), select and approve, finance and implement, monitor and control, and post-audit. This cycle improves future estimates.
Write a short note on steps in capital budgeting.
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.
Steps in capital budgeting
- 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 steps form a cycle, because the lessons from post-audit improve future cash-flow estimates and decisions.
✓ Answer checked by Claude Opus 5.5 (high effort)
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