Question

What is the difference between screening and preference decisions?

Answer 1

A screening decision is usually made inorder to ensure that if a proposed investment is worth the money and time.

For example, an entity may have a policy of taking up projects if they ensure a return of, say, 15% or above on the investment made. The required rate of return is the minimum rate of return a project must yield to be acceptable.

Usually after these screening decisions have already been made, a preference capital budgeting decision is made . The alternatives being considered have already passed the test and have been shown to be advantageous.

To illustrate, an entity may be considering some different plant and machinaries to replace an existing one on the assembly line. The choice of which machine to purchase is a preference decisions.