Question

What is the advantage of classifying capital projects? what role does project size play in classifications?

Answer 1

The capital projects involve a large cost and large scale relative to other investments that involve less resources and planning. It is important that capital projects are properly managed as they need a big commitment of company time and resources. As the project is an economic activity with a well-defined motive with specific durations and gains to entrepreneurs thus it cannot take place at a single level and is classified at different levels. The project classification and recognition of statistically and/or economically dependent proposals helps to reduce the cost and more efficiency.

The projects can be classified as per the project size, degree of dependence, degree of statistical dependence, type of benefit to the firm and type of cash flow. Project size plays an important role in classifying capital projects. The large projects are usually when the project is over half a million dollars or more. The Board of Directors' approval must be required for large projects, however small projects can be approved by departmental managers