Capital Allocation: The Four-Step Process
The director of a corporate finance department was just given the following financial figures to review for the company's manufacturing expansion project that was completed four years ago:
| Metric | Year 1 | Year 2 | Year 3 | Year 4 |
|------------------|---------|--------|--------|--------|
| Revenues | 62,500 | 74,800 | 83,250 | 90,650 |
| Expenses | 70,750 | 72,700 | 74,100 | 79,850 |
| Operating Income | (8,250) | 2,100 | 9,150 | 10,800 |
The capital allocation process step the director is about to participate in is _most likely_:
Incorrect.
Although the director is about to perform an after-the-fact analysis of project financials, the analysis of individual projects occurs earlier in the capital allocation process and helps to determine which projects warrant further consideration _prior to_ investment.
Incorrect.
The work that the company has done in planning its capital allocation has been a key step in determining which projects would be profitable and benefit the company, given any resource constraints. However, this step is performed _prior to_ investment.
Correct.
Because the director is going to be reviewing actual financial results _after_ the investment has already been made, they are indeed monitoring and post-auditing. Their analysis might reveal that the expansion project has been a success, in which case it could become a model for future investments. Alternatively, information could be gleaned that suggests results fell short of expectations.
planning the capital allocation.
monitoring and post-auditing.
investment analysis.
