CIMA P2 Syllabus B. Capital Investment Decision Making - Capital Budgets And Phases Of Investment Decision-Making - Notes ^{1 / 6}

Capital budget usually covers longer period than production budgets (about 3 - 5 years).

Therefore it should be based on:

• Current production budget information

• Expected future production level

• Other long-term expectations (in the organisation, in industry etc.)

PHASES OF INVESTMENT DECISION-MAKING

1. CREATION PHASE 

   - setting objectives, identification of opportunities and assessing business environment

2. DECISION PHASE 

   - initial screening and listing possible alternatives, carrying out financial analysis

3. IMPLEMENTATION PHASE 

   - review of decision and post-completion audit

PCA is an objective independent assessment of the success of a capital project in relation to plan.

It covers the whole life of the project and provides feedback to managers to aid the implementation and control of future projects.

PCA is usually carried out up to 1 year after the project completion.

Advantages of having a financial limit on new project:

1. The shareholders may be unhappy if too many new investments are made.

2. The company has a better understanding of the funding that it requires each year.

3. Managers may focus more on finding higher-quality projects