---
title: "Finance sources; capital budgeting steps; NPV"
subject: "Project Engineering"
chapter: 6
key: "semester_7/project_engineering:sources-project-finance-steps-capital-budgeting"
source: https://www.bctengineer.com/q/semester_7/project_engineering/sources-project-finance-steps-capital-budgeting
site: BCT Engineering
---

# Finance sources; capital budgeting steps; NPV

Project Engineering · Chapter 6: Introduction to Project Financing

- Asked in: 2081 Baisakh, 2+3+2 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/sources-project-finance-steps-capital-budgeting
- Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-6

## Question

Write down the sources of project financing. Explain the steps of the capital budgeting process. Discuss net present value (NPV) used in capital budgeting decision.

## Short answer

Sources are equity (ordinary shares, IPO, retained earnings), quasi-equity (preference shares, convertible debentures), long-term debt (bank, syndicated loans, bonds), government and donor funds, and others such as leasing and PPP/BOT. Capital budgeting steps are identify, screen, estimate cash flows, evaluate, select, implement, monitor, and post-audit. NPV is present value of inflows minus outflows discounted at the cost of capital; accept if NPV is positive.

## Answer

#### Sources of project financing

| Type | Sources |
|---|---|
| Equity | Ordinary shares, sponsors' equity, retained earnings, public issue (IPO) |
| Quasi-equity | Preference shares, convertible debentures |
| Debt (long term) | Bank and financial institution loans, debentures/bonds, syndicated loans, term loans |
| Government / donors | Government grants and budget, soft loans from ADB, World Bank, JICA, Exim banks, bilateral aid |
| Others | Supplier's credit, leasing, venture capital, public-private partnership (PPP), build-operate-transfer (BOT), community and user contribution, remittance/pooled funds |

#### Steps in the capital budgeting process

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.

#### Net present value (NPV)

**Net present value (NPV)** is the difference between the present value of all cash inflows and the present value of all cash outflows, discounted at the required rate of return (cost of capital).

$$
NPV = \sum_{t=1}^{n}\frac{CF_t}{(1+k)^t} + \frac{S}{(1+k)^n} - I_0
$$

where $CF_t$ is net cash flow in year $t$, $k$ is the discount rate, $S$ is salvage value and $I_0$ is the initial investment.

- **Decision rule:** accept if NPV > 0; reject if NPV < 0; for mutually exclusive projects choose the highest NPV.
- **Advantages:** considers the time value of money, all cash flows and the size of the project; gives the gain in money terms; additive.
- **Limitations:** needs a correct discount rate; harder to explain; ranking can be misleading for projects of different size and life.

## Check yourself

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

1. Which is the correct order in capital budgeting?
   A. Evaluate, identify, select, screen, audit
   B. Identify, screen, estimate cash flows, evaluate, select, finance and implement, monitor, post-audit
   C. Implement, estimate, screen, identify
   D. Post-audit first, then identify
   Answer: B. The process runs from identification to post-audit as listed. (Key point: Capital budgeting steps)

2. What is NPV?
   A. Sum of undiscounted inflows
   B. Time to recover investment
   C. PV of inflows minus PV of outflows at the required rate
   D. Inflows divided by outflows
   Answer: C. NPV discounts all cash flows at the required rate and takes the difference. (Key point: NPV definition)

3. Which is the NPV decision rule?
   A. Accept if NPV < 0
   B. Reject if NPV > 0
   C. Choose lowest NPV
   D. Accept if NPV > 0; choose highest NPV for mutually exclusive projects
   Answer: D. Accept positive NPV; for mutually exclusive projects, choose the highest. (Key point: NPV rule)

4. What is a limitation of NPV?
   A. Needs a correct discount rate and ranking can mislead for different sizes and lives
   B. Ignores time value of money
   C. Ignores salvage value
   D. Cannot be added across projects
   Answer: A. NPV needs the right discount rate; it considers time value and is additive. (Key point: NPV limitation)

## Related in Project Engineering

- [Project finance sources; capital structure determinants](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproject-finance-sources-capital-structure-determinants) — Project Engineering, chapter 6, asked 3×
- [Capital budgeting; importance; NPV](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-importance-npv) — Project Engineering, chapter 6
- [Project financing; structures; capital structure steps](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproject-finance-define-structures-steps) — 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
- [Conventional vs project financing; ARR, NPV, PI, payback](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aconventional-vs-project-financing-numerical) — Project Engineering, chapter 6
- [Sources of finance; ARR, payback, IRR, PI decision](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproject-finance-sources-investment-decision-c75) — Project Engineering, chapter 6

## Related in other subjects

- [NPV and payback of a startup project](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Anpv-payback-startup-project) — Entrepreneurship Development, chapter 5
- [Decision procedure by critical value approach](https://www.bctengineer.com/question.md?key=semester_5%2Fprobability_and_statistics%3Adecision-critical-value-approach) — Probability and Statistics, chapter 6
- [Key principles of project budgeting](https://www.bctengineer.com/question.md?key=semester_7%2Fict_project_management%3Abudgeting-principles) — ICT Project Management, chapter 9