---
title: "Short note: Steps in capital budgeting"
subject: "Project Engineering"
chapter: 6
key: "semester_7/project_engineering:capital-budgeting-steps-note"
source: https://www.bctengineer.com/q/semester_7/project_engineering/capital-budgeting-steps-note
site: BCT Engineering
---

# Short note: Steps in capital budgeting

Project Engineering · Chapter 6: Introduction to Project Financing

- Asked in: 2066 Bhadra (old course), 4 marks
- Video: [Capital Budgeting: NPV, IRR, Payback | MUST-KNOW for Finance Roles](https://www.youtube.com/watch?v=7gG0Evugubo) — Kenji Explains
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_7/project_engineering/capital-budgeting-steps-note
- Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-6

## Question

Write a short note on 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.

## Answer

**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

1. **Identification of investment opportunities:** generate project ideas (new product, replacement, expansion).
2. **Screening and preliminary evaluation:** reject unsuitable ideas.
3. **Estimation of cash flows:** estimate initial cost, annual inflows, outflows and salvage value.
4. **Evaluation:** apply techniques (payback, ARR, NPV, IRR, PI).
5. **Selection and approval:** choose the best project(s) under budget; top management approves.
6. **Financing and implementation:** arrange funds, plan and execute.
7. **Monitoring and control:** compare actual with forecast and take action.
8. **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.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. Who approves the selected project(s)?
   A. Top management
   B. Customers
   C. Suppliers
   D. Junior staff
   Answer: A. Selection and approval chooses the best project(s) under budget, approved by top management. (Key point: Selection)

2. Monitoring and control means:
   A. Generating ideas
   B. Comparing actual with forecast and taking action
   C. Choosing the discount rate
   D. Rejecting ideas
   Answer: B. Actual results are compared with forecast and corrective action taken. (Key point: Monitoring)

3. Why do the steps form a cycle?
   A. Projects are repeated unchanged
   B. Evaluation comes last
   C. Post-audit lessons improve future cash-flow estimates and decisions
   D. Screening is skipped
   Answer: C. Learning from post-audit feeds into future estimates. (Key point: Cycle)

4. Which are applied in the evaluation step?
   A. Sales, production, cash budgets
   B. Variance analysis only
   C. Tax audits
   D. Payback, ARR, NPV, IRR, PI
   Answer: D. These are the techniques used to evaluate the project. (Key point: Evaluation techniques)

## Related in Project Engineering

- [Finance sources; capital budgeting steps; NPV](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Asources-project-finance-steps-capital-budgeting) — Project Engineering, chapter 6
- [Capital budgeting needs, steps, process](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-needs-steps-process) — Project Engineering, chapter 6
- [Capital budgeting and its features](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-process-features) — Project Engineering, chapter 6
- [Capital budgeting importance and techniques](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-importance-techniques) — Project Engineering, chapter 6
- [Capital budgeting; importance; NPV](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-importance-npv) — Project Engineering, chapter 6
- [Capital budgeting methods; most reliable](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-methods-reliable) — Project Engineering, chapter 6