ABSTRACT
The following steps are required:
The total project requirements need to be ascertained over the relevant number of years. For instance, a corner shop might only be looking over a six-month period, and a large corporation might be looking over five to ten years, or even a 20-year period.
The sum total of all the possible projects is then computed over the time period, and it is compared with the available capital. Most often, there is a shortfall as the capital is restricted or ‘rationed’ for a whole variety of reasons (for example, desire of business owner to stay within a certain size, shortage of cash, inability to raise the finance from the bank or shareholders, caution, or decision to invest only out of previous years’ profits).
The projects then have to be ranked alongside each other, to establish which gives the best rate of return based on their ‘relative’ (see later) benefits and costs.
