Arrange the following items, i.e., stages of capital budgeting in correct sequence:
1. Identification of potential investment opportunities
2. Assembling of proposed investments
3. Decision making
4. Implementation and performance review
5. Preparation of capital budget and appropriations
Choose the correct answer from the options given below:

Correct option is D

The capital budgeting process involves a systematic approach to identify, evaluate, and implement investment opportunities. The stages in the correct sequence are:

1. Identification of Potential Investment Opportunities (1):

   • The process begins with identifying opportunities for investments, such as new projects or asset replacements, that align with the organization’s strategic objectives.

2. Assembling of Proposed Investments (2):

   • After identifying potential opportunities, they are gathered and analyzed in detail, focusing on their technical, operational, and financial aspects.

3. Decision Making (3):

   • This stage involves evaluating and selecting the best investment proposals using capital budgeting techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, etc.

4. Preparation of Capital Budget and Appropriations (5):

   • A formal budget is prepared for the approved investments, allocating necessary funds and ensuring proper authorization.

5. Implementation and Performance Review (4):

   • The final stage involves executing the approved projects and monitoring their performance to ensure they meet the expected outcomes.

Thus, the correct sequence is 1 → 2 → 3 → 5 → 4.

Information Booster:

1. Key Capital Budgeting Techniques:

   • Net Present Value (NPV): Measures the profitability of an investment by comparing the present value of cash inflows and outflows.
   • Internal Rate of Return (IRR): The discount rate that makes the NPV of an investment zero.
   • Payback Period: Time required to recover the initial investment.
   • Profitability Index (PI): Ratio of the present value of cash inflows to the initial investment.

2. Importance of Capital Budgeting:

   • Ensures optimal use of limited resources.
   • Helps in aligning investments with long-term strategic goals.
   • Reduces risks associated with large investments.

3. Challenges in Capital Budgeting:

   • Uncertainty in cash flow projections.
   • Changes in economic conditions and market dynamics.
   • Difficulty in quantifying non-financial benefits.

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