The capital budgeting process is important, but is it the most important process that a firm undertakes. Why or why not? If you believe there is a more important process, what is it and why do you think it is more important? Also Brigham and Ehrhardt (2014) define capital budgeting as the whole process of analyzing projects and deciding whether they should be included in the capital budget. This process is of fundamental importance to the success or failure of the firm as the fixed asset investment decisions chart the course of a company for many years into the future.



Conceptually, the capital budgeting process is identical to the decision process used by individuals making investment decisions. These steps are involved:



1. Estimate the cash flows—interest and maturity value or dividends in the case of bonds and stocks, operating cash flows in the case of capital projects.



2. Assess the riskiness of the cash flows.



3. Determine the appropriate discount rate, based on the riskiness of the cash flows and the general level of interest rates. This is called the project cost of capital in capital budgeting.



4. Evaluate the cash flows.



Brigham and Ehrhardt, (2014) Financial Management w/access, South-Western Cengage Learning, 14th edition 2014