A Follow-up Note on Capital Budgeting 263
(the team would abandon the project while preserving as much of the value earned to date as possible). Each
of these alternatives is evaluated and the best course of action is chosen. The three-phase process followed
by SB is as shown:
Guidance
Generate
alternatives
Options
Calibration
Value
alternatives
Evaluations
Decision
making
Allocate
resources
Refinements
Starting point
Management
teams
Project teams
Phase I Phase II Phase III
Exhibit 13.1 Dynamic project evaluations
Make assessment of
preliminary estimates
of cash flows and NPV
as well as assumptions
regarding competitive
entry and product
cannibalization
Make final
evaluation of
all key assumptions
regarding base case
competitive entry,
cannibalization
and residual value
Make sure base case
is correctly identified.
Set budget for expenses
during B.E. phase
Identify criteria and
dates for post audit.
Assess NPV and risk.
Specify an expense
budget that is linked to
the capital budget
Set date for
preliminary evaluation
tollgate
Set date for B.E. phase Set date for the product
launch
Set a budget for
expenses during
the preliminary
evaluation phase
Evaluate whether
proposed project
is consistent with
strategy
Approve/
Reject
Strategic
evaluation
tollgate
Preliminary
evaluation
tollgate
Business
evaluation
tollgate
Preliminary
Evaluation
Phase
Business
Evaluation
Phase
New Ideas S.E.T. P.E.T. B.E.T.