Economics Capital Budgeting Questions
The main steps involved in the capital budgeting process are as follows:
1. Identification and generation of investment opportunities: This step involves identifying potential projects or investments that align with the organization's strategic objectives and have the potential to generate positive cash flows in the future.
2. Evaluation and screening of investment proposals: In this step, the identified investment opportunities are evaluated and screened based on various criteria such as profitability, risk, and alignment with the organization's goals. Techniques like net present value (NPV), internal rate of return (IRR), and payback period are commonly used for evaluation.
3. Analysis of cash flows: This step involves estimating the cash inflows and outflows associated with each investment proposal. It includes forecasting future cash flows, considering factors like sales revenue, operating costs, taxes, and salvage value.
4. Selection and decision-making: After evaluating and analyzing the investment proposals, the management selects the most viable projects based on their financial viability, strategic fit, and risk considerations. The decision-making process may involve comparing the financial metrics of different projects and considering qualitative factors.
5. Implementation and monitoring: Once the investment proposals are approved, the selected projects are implemented. This step involves allocating resources, setting up project teams, and monitoring the progress of the projects to ensure they are executed as planned.
6. Post-evaluation and review: After the completion of the projects, a post-evaluation is conducted to assess the actual performance and outcomes against the projected estimates. This step helps in identifying any deviations, learning from the experience, and improving the capital budgeting process for future investments.