Question

Questions #3 What are the steps in the capital budgeting process?

Answer 1

Capital budgeting is referred to as a financial process that is used by the business to determine whether the project or proposal should be accepted or not.

Steps in the capital budgeting process are as follows:

Identification of investment opportunities: Firstly, the potential opportunities are identified among the available opportunities. Opportunities are identified through SWOT analysis before being invested upon.

Estimating the cost of investment: After the potential opportunities are identified, the cost is also determined, which project will incur maximum and minimum costs.

Estimating the cash flow: The project so chosen will provide maximum cash flow with minimum cost. The potential project will have the lowest payback period that determines that the company will earn cash inflows equal to cash outflows in the lowest period.

Estimating the risk: The project so chosen should have the minimum risk with the required level of return. Risk and return have direct relationship. Higher the risk higher be the return. The project that will give maximum return with given level of risk should be chosen.

Implementation: After all the scenarios are evaluated, the project is accepted and implemented. A prior plan is created as to how the project should be executed that will be beneficial to the company in the most effective way.