Final answer:
The first step in the capital budgeting process is to determine expected cash flows by estimating costs and predicting future revenues. Mathematical models and comparisons per unit help evaluate different solutions. The choice of financial capital source further impacts the process.
Step-by-step explanation:
The first step in the capital budgeting process is often to determine the expected cash flows. This involves calculating how much money the project is expected to bring in or save the company over time. This crucial step lays the groundwork for evaluating whether the project is financially feasible and worth pursuing.
To begin, firms may build mathematical models to estimate costs for the different approaches during the idea generation phase. These models are also used to predict costs for various alternative solutions. By comparing the costs of each solution per unit (such as cost per thousand gallons of water in an engineering project), firms can decide which ideas are most effective and deserving of further development. As a result, determining cash flow can also involve the engineering design process, budget for product development, and understanding the rate of flow of money, similar to understanding the rate of the flow of water through a hose, for example.
Companies may also consider different methods of raising financial capital, such as from early-stage investors, reinvesting profits, borrowing through banks or bonds, and selling stock. These choices will influence the overall approach to funding the project and managing future revenue streams.