Describe the five Capital budgeting decision process steps you would take to access the investment opportunity.

Overview and summary of Describe the five Capital budgeting decision process steps you would take to access the investment opportunity

Capital budgeting is based on the different kinds of steps that are used in the determination of the resources available in the investment that will be used in the project to create value of the business. An organization must use capital budgeting to learn about the new investment opportunity and to improve the existing training programs used to implement in the organization. Capital budgeting is process to determine the investment funds in more appropriate way so that it could be attained in better form. For instance in the investment of a certain project, cash is said to have time esteem supposing that contributed after some time it can gain premium(Gilbert, 2005). For instance, $1.00 today is worth $1.05 in one year, whenever contributed at 5.00%. In this manner, the current worth is $1.00, and the future worth is $1.05. Alternately, $1.05 to be gotten in one year's time is a Future Value income. However, it’s worth today would be its Present Value, which again accepting a loan fee of 5.00%, would be $1.00. Capital budgeting process is based on the following five steps with the justification of estimation for revenue, net cash flows, sales, earnings as other investment cost:

·         Identify any evaluates the opportunities

The process starts with the exploration of the opportunities in the market. In the market, an investor has many opportunities but the efficient one is who learn to recognize best opportunity in the market and invest his funds in the best opportunity. Let suppose in the investment of ABC project we have to analyze opportunity with estimation of revenues as follow:

·         Determine implementing cost of Describe the five Capital budgeting decision process steps you would take to access the investment opportunity

The next step is based on the preparation of the budget that how much it will cost to the company to get the project. For this purpose there must be research in the external and internal factors that could influence on the investment. If manufacturing company wants to improve its production they must have to install better machinery so that company could reach at the level of efficiency (Motley Fool Staff, 2016)

·         Estimate cash flow of Describe the five Capital budgeting decision process steps you would take to access the investment opportunity

Any project in the financial sectors have cash flow that could be achieved in the in the project. There must be review of all the cash inflows and outflows so that final profit could be estimated. Once the profit is estimated it could be easy to learn about the initiatives of the market. Cash flows for 4 years are determined as below:

·         Assessment of risk and calculation of NPV

This step relates in the estimation of the risk that could be faced in the investment in that project, this risk must include the cost that could be bear by the company if the project fail. If the risk value is determined the company can implement the risk mitigation measures in the investment of a project(Batra & Verma, 2014). NPV could be calculated for a specific project as follows:

PV of Cash Flow = Cash Flow ÷ (1 + Discount Rate) Year

·         Implementation of Describe the five Capital budgeting decision process steps you would take to access the investment opportunity

When company selects to go forward with the new project, it will be required to implementation of a plan that must be include the project in hand and its cost that may be beneficial with the key points that are prepared to invest in the projects (Batra & Verma, 2014)

Required rate of return: D1/P0 + g = Ke

$3/$40 + 0.02= 0.095

Dividend Growth model: P= D1/ (k-g)

$3/ (0.095-0.05) = $66.66

But their market price for the share currently trades for $40, which means the stock is overvalued by $26.66

Flotation cost: 6% (Underwriting costs)

References of Describe the five Capital budgeting decision process steps you would take to access the investment opportunity

Batra, R., & Verma, S. (2014). An Empirical Insight into Different Stages of Capital Budgeting. Global Business Review, 15(2), 339-362.

Gilbert, E. (2005). Capital budgeting: A case study analysis of the role of formal evaluation techniques in the decision making process. SA Journal of Accounting Research, 19(1), 1-13.

Motley Fool Staff. (2016). The 5 Steps to Capital Budgeting. Retrieved April 15, 2020, from https://www.fool.com/knowledge-center/the-5-steps-to-capital-budgeting.aspx