Introduction to Finance

1.
Identifi cation
2.
Development
3.
Selection
4.
Implementation
5.
Follow-up 
The 
identifi cation stage
involves fi nding potential capital investment opportunities and 
identifying if each project involves a replacement decision and/or revenue expansion. The 
development stage
requires estimating relevant cash infl ows and outfl ows. It also involves 
discussing the pros and cons of each project. Development sometimes requires asking what 
the strategic impact will be of 
not
doing the project.
The 
selection stage
involves applying the appropriate capital budgeting techniques to 
make a fi nal accept or reject decision. In the 
implementation stage
, accepted projects must 
be executed in a timely fashion. Finally, decisions need to be reviewed periodically, with a 
follow-up stage
analysis to determine if projects are meeting expectations. If disappointing 
results occur, it is sometimes necessary to terminate or abandon previous decisions.
GLOBAL
The multinational corporation (MNC) must go through the same capital budgeting 
process for projects. In addition, however, MNCs need to consider possible added political and 
economic risks when making their decisions. Risk adjustments may be necessary because of 
the possibility of seizure of assets, unstable currencies, and weak foreign economies. In addi-
tion, MNCs must analyze the impact of foreign exchange controls and foreign tax regulations 
on a project’s cash fl ows in relation to the fi nal amounts that may be paid to the parent fi rm.
In Chapter 13, we stated how a company’s mission should guide management in mak-
ing investment decisions as they strive to meet goals and maximize shareholder wealth. We 
looked at mission statements for several fi rms also. Here, let’s review some of the capital 
projects in which these fi rms are investing.