Phases of Capital Budgeting

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Phases of Capital Budgeting

By | September 2011
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Capital budgeting is a complex process and there are five broad phases. These are planning, analysis, selection, implementation and overview. Planning
The planning phase involves investment strategy and the generation and preliminary screening of project proposals. The investment strategy provides the framework that shapes, guides and circumscribes the identification of individual project opportunities. Capital Budgeting Process

Analysis
If the preliminary screening suggests that the project is worth investing, a detailed analysis of the marketing, technical, financial, economic, and ecological aspects is conducted. Selection
The selection process addresses the question—is the project worth investing? A wide range of appraisal criteria has been suggested to judge the worth of a project. There are two broad categories. Non-Discounting criteria and Discounting criteria. Some selection rules for both methods are listed below: - Non-discounting criteriaAcceptReject

Pay Back Period (PBP)PBP < target periodPBP >target period Accounting Rate of Return (ARR)ARR > target rateARR < target rate

Discounting criteriaAcceptReject
Net Present Value (NPV)NPV > 0NPV < 0
Internal Rate of Return (IRR)IRR > cost of capitalIRR < cost of capital Benefit- Cost Ratio (BCR)BCR >1BCR < 1
Implementation
The implementation phase for an industrial project, which involves the setting up of manufacturing facilities, consists of several stages: I. Project and engineering designs
II. Negotiations and contracting
III. Construction
IV. Training
V. Plant commissioning
Review
Once the project is commissioned, a review phase has to be set in motion. Performance review should be done periodically to compare the actual performance with the projected performance. In this stage, feedback is useful in several ways: •It focuses on realistic assumptions

It provides experience,...