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Financial Management - Capital Budgeting – A Conceptual Framework

Capital Budgeting Process

   Posted On :  19.06.2018 11:00 pm

The important steps involved in the capital budgeting process are Project generation, (2) Project evaluation, (3) project selection and project execution.

Capital Budgeting Process
 
The important steps involved in the capital budgeting process are (1) Project generation, (2) Project evaluation, (3) project selection and (4) project execution.

1. Project Generation


Investment proposals of various types may originate at different levels within a firm. Investment proposals may be either proposals to add new product to the product line or proposals to expand capacity in existing product lines. Secondly, proposals designed to reduce costs in the output of existing products without changing the scale of operations. The investment proposals of any type can originate at any level. In a dynamic and progressive firm there is a continuous flow of profitable investment proposals.
 

2. Project  evaluation.    


Project evaluation involves two steps: estimation of benefits and costs and ii) selection of an appropriate criterion to judge the desirability of the projects. The evaluation of projects should be done by an impartial group. The criterion selected must be consistent with the firm’s objective of maximizing its market value.

3. Project Selection. 


There is no uniform selection procedure for investment proposals. Since capital budgeting decisions are of crucial importance, the final approval of the projects should rest on top management.

4. Project Execution. 


After the final selection of investment proposals, funds are earmarked for capital expenditures. Funds for the purpose of project execution should be spent in accordance with appropriations made in the capital budget.
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