1. Objective and criteria the first step is to define a clear objective.

Care should be takedn not define an objective that is too narrow. Criteria also needs to be determined to measure how well an alternative meets the objectives. Economics is the primary criterio n but other factors like safety, timeliness and reputation of the firm has to be considered 2. Identify Alternatives Second step is to identify alternative solutions to the probelm. it is sometimes necessary to engage in brainstorming sessions with other stakeholders so differ ent ideas and solutions can be tossed aorund and analysed. All possibilities sho uld be given some thought since a useless idea might trigger a good suggestion 3. Analyze in stages An initaial analyses has to be performed so we can eliminate the poor alternativ es at this stage. It involves coming up with rough estimates and cost analysis. 25% margin of error is allowed at this stage. If several alternatives still appe ar to be promising after the initial analysis, then further investigation is nec essary. An intermediate analysis with about 15 to 20% error is allowed. If more analysis is needed before an alternative can be chosen, then a final analysis is carried out with a 10% accuracy. COst overuns are inversely proportional to the amount of design effort 4 and 5. Choose implement and follow up Once the best alternative has been selected, implementation begins after ther ha s been enough design work carried out. IT is important to follow up on the desig n and keep records so that there can be a comparison of estimates and designs to determine areas which needs improvement Inflation multi year projects can be affected by inflation so it must be taken into accoun t Sensitivity analysis Cost and estimaates are not always accurate, hence, the ned for sensitivity anal ysis. They analyse the effects of different possible values of project factors o n the economics of a project. brekaeven analysis is a form of sensitivity analys is. It helps us to make decisions based on unvertain data Risk Assesment Risk estimates is used for dealing with potential errors that may arise by asses ing the propabilities associated with the cost and benefits of different alterna tives Capital Budgeting capital budgeting decisions helps in dealing with alternatives that are not muta lly exclusive a firm must determine which 10 or 15 wells to drill out of 40.In s ummary, the company undertakes capital budgeting analysis when it has more proje cts than capital to fund the projects Financing financing simply means borrowing money from the banks to fund a project, thus, i f the project is profitable enough. System Viewpoint considers the impact of the problem from an organizational standpoint MEasurable cost and benefits Whenever possible all cost abd benefits must be assigned numerical values

Differences among alternatives BAse decisions on differences amonst alternatives MArginal Analysis/ incremental analysis Estimate changes in cash flows caused by a project not averages, thus analyses i nvolving increasing or decreasing some level of activity must be based on the ch ange in costs or benefits not average values Sunk Costs Only present and future cash flows should be considered, this is mone y that has already been spent on a project Objectivity BE honest and impartial