Hello, Hello, what is the definition of capital budgeting? Capital budgeting is a process. Which it starts a business to evaluate potential major projects or investments. These are examples of projects that would require capital budgeting before approval or rejection, such as the construction of a new plant or a large investment in an outside enterprise. But what is the process of capital budgeting? There are four important steps involved in the capital budgeting process. Which is mentioned below following stepwise step?
Four Steps of Capital Budgeting Process
1. Project Generation:
These different types of investment proposals can arise at different levels within a firm. Investment proposals that may be either proposals to add new products to the product line or to expand capacity in existing product lines. Secondly, proposals designed to reduce costs in the production of existing products without changing the scale of operations. Any type of investment proposals can be generated at any level. In a dynamic and progressive firm, there is a continuous flow of profitable investment proposals.
2. Project Evaluation:
This project evaluation consists of two stages: 1) estimation of benefits and costs and 2) selection of an appropriate criterion to judge the desirability of projects. Projects should be evaluated by an unbiased group. The criteria chosen should be consistent with the objective of maximizing the market value of the firm.
3. Project Selection:
There is no uniform selection procedure for investment proposals. Since capital budgeting decisions are of critical importance, final approval of projects should rest on top management.
4. Project Execution:
After the final selection of investment proposals, funds are earmarked for capital expenditure. For the purpose of project execution, funds should be spent as per the appropriations made in the capital budget.
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