# Capital Budgeting Process & Types of Investment Decisions
## The Six-Step Capital Budgeting Process
| Step | Name | Key Activity |
|---|---|---|
| 1 | Planning | Identify potential opportunities; filter out poor ideas early |
| 2 | Evaluation | Assess cash inflows/outflows; verify project meets business goals |
| 3 | Selection | Choose project(s) that maximise shareholder wealth, weighing returns, risks, and cost of capital |
| 4 | Implementation | Acquire funds, purchase assets, begin execution |
| 5 | Control | Monitor via capital expenditure reports, performance reports, and post-completion audits |
| 6 | Review | Analyse overall success or failure of the project |
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## Types of Capital Investment Decisions
### Based on Firm's Existence
| Type | Purpose | Also Called |
|---|---|---|
| Replacement | Replace assets whose economic life is over | Cost Reduction Decision |
| Modernisation | Upgrade to technologically superior assets | Cost Reduction Decision |
| Expansion | Add capacity when existing capacity is insufficient | Revenue Expansion Decision |
| Diversification | Enter new products/markets to reduce concentration risk | Revenue Expansion Decision |
### Based on Situation
| Type | Description | Decision Rule |
|---|---|---|
| Mutually Exclusive | Only one of several competing proposals can be accepted | Accept the best-ranked; acceptance automatically rejects others |
| Accept-Reject | Independent proposals that do not compete with each other | Accept if Return ≥ Required Rate; Reject if Return < Required Rate |
| Contingent | One investment requires another investment as a prerequisite | Cannot evaluate in isolation |
> Memorise: Replacement + Modernisation = Cost Reduction. Expansion + Diversification = Revenue Expansion.