## Steps of the Capital Budgeting Procedure

Capital budgeting follows three core steps:

1. Estimation of cash flows over the entire life of each project under consideration.

2. Evaluation of each alternative using different decision criteria (NPV, IRR, payback, etc.).

3. Determining the minimum required rate of return — i.e., the WACC — to be used as the discount rate (covered in the Cost of Capital chapter).

### Structure of the topic

Because of these steps, the study of capital budgeting is divided into two sections:

Part A — Estimation of Cash Flows
Part B — Capital Budgeting Techniques

⚠️ Common exam mistakes

Using a discount rate other than WACC without justification — WACC is the default minimum required rate of return.
Estimating cash flows for only part of the project life instead of the entire life.

Reference:

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