Screening decision

Definition

Screening decision is the process of evaluating potential investments to determine if they meet a specific set of criteria. It helps in deciding whether an investment proposal should be considered further.

5 Must Know Facts For Your Next Test

1. 1. Screening decisions typically use techniques like Net Present Value (NPV) and Internal Rate of Return (IRR) to assess the viability of projects.
2. 2. These decisions help managers eliminate projects that do not meet minimum financial thresholds before further analysis.
3. 3. Screening is often the first step in a multi-phase capital budgeting process.
4. 4. Criteria for screening might include financial metrics, strategic alignment, and resource availability.
5. 5. The outcome of a screening decision can significantly influence which projects are pursued and funded by a company.

Review Questions

• 1. What financial metrics are commonly used in making screening decisions?
• 2. Why is the screening decision an essential step in capital budgeting?
• 3. How can the criteria for screening decisions impact project selection?

Related terms

Net Present Value (NPV):

A method used to evaluate investments by calculating the difference between present value of cash inflows and outflows over a period of time

Internal Rate of Return (IRR):

A metric used in capital budgeting to estimate the profitability of potential investments

Capital Budgeting:

The process by which a business determines and evaluates potential major investments or expenditures