Process of Capital Budgeting

Process of Capital Budgeting

Generally the process of capital budgeting involves following steps:

1. Project Generation: The generation of the pro-
posals may fall under any of the following categories

(a) Additions to the present product line.

(b) Expand the capacity of the existing product line.

(c) Proposals to reduce costs of the existing product line without affecting the scale of operations.

The generation of the projects may take place at the levels of top management or at the level of workers also.

2. Project Evaluation: As in case of any types of
decision makings, the capital budgeting decisions also have two faces. Firstly, estimation of the benefits and costs measured in terms of cash flows and secondly, selection of an appropriate criterion to judge the desirability of the projects. It is necessary that the evaluation of the projects is done by impartial group and experts in the fields. Care must be taken to choose the criteria to judge the desirability of the projects and it should be consistent with the company’s basic objective to maximize the wealth.

3. Project Selection: There is no fixed and laid down procedure to select the final criteria among the various available alternatives. Generally, the selection of the final project is done by the top management though it may be scrutinized at various levels. In many cases, top management may delegate the authority to approve certain projects to lower management also.

4. Project Execution: After the final selection of the project is made, the funds are appropriated and the execution of the project is carried on. However, there has to be a proper system to check that the execution of the project is being made as per the predecided plans and schedules.

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