Corporate Finance

A Follow-up Note on Capital Budgeting 
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(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.