Capital Budgeting Process

Capital Budgeting Process

Introduction

The capital budgeting process is a very helpful procedure to decide the project in which the company should make investment. Therefore, the first part of this assignment is focused on providing a summarized budgeting process, the tools that are used in it to determine the viability of the project, whereas the second part identifies and lists the various advantages and disadvantages regarding the issuance of common stocks and preferred stocks.

Discussion

Summary of Capital Budgeting Process

It is the process of examining various investment proposals on the basis of the cash that needs to be invested and the resulting future benefits over a period of time. The evaluation of the various projects is conducted by following a set of procedures. The first steps involves finding of various business opportunities and the amount of capital that will be required in each of those opportunities. In the second step, the various proposals are evaluated by determining the cash flows that are expected from each of the project. The riskiness of each of the projects' cash flow is determined by using the probability distribution of outflows. The management calculates the cost of capital at which the outflows need to be discounted based on the riskiness of the projects. The present value of expected cash flows is determined using the calculated discount rate. As the final step, the calculated present value of the project is compared with the required rate of return of the investor and if the present value of cash flows exceeds the cost then the project is approved to be invested in. if not, then the project is rejected (www.capitalbudgetingtechniques.com).

Steps To Ensure Fair Assessment of Projects

In order to fairly assess a project, it is very important to determine the correct cost and expected inflows from the project because the decision ...