Consider the following statements about the investment decision:
(A) A capital budgeting decision affects the earning capacity of a business in the long run.
(B) The size of assets, profitability and competitiveness of a business are all affected by capital budgeting decisions.
(C) A capital budgeting decision can normally be reversed at a low cost.
(D) Investment in fixed assets includes expenditure on their expansion, modernisation and replacement.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B) and (D) only
(A) A capital budgeting decision affects the earning capacity of a business in the long run. — Correct. A capital budgeting decision commits funds to long-term assets. These assets decide how much the business can earn in the long run.
(B) The size of assets, profitability and competitiveness of a business are all affected by capital budgeting decisions. — Correct. The assets the firm buys, the profit they bring and its strength against rivals all depend on these decisions.
(C) A capital budgeting decision can normally be reversed at a low cost. — Incorrect. These decisions involve huge sums and are irreversible except at a huge cost. Once made, a business can hardly get out of them.
(D) Investment in fixed assets includes expenditure on their expansion, modernisation and replacement. — Correct. Investment in fixed assets covers their acquisition, expansion, modernisation and replacement.
NCERT (2026-27 Edition): “Investment Decision … Investment decision can be long-term or short-term. A long-term investment decision is also called a Capital Budgeting decision. It involves committing the finance on a long-term basis. For example, making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch, etc. These decisions are very crucial for any business since they affect its earning capacity in the long run. The size of assets, profitability and competitiveness are all affected by capital budgeting decisions. Moreover, these decisions normally involve huge amounts of investment and are irreversible except at a huge cost. Therefore, once made, it is often almost impossible for a business to wriggle out of such decisions. Therefore, they need to be taken with utmost care. …” “Management of Fixed Capital … Investment in these assets would also include expenditure on acquisition, expansion, modernisation and their replacement. These decisions include purchase of land, building, plant and machinery, launching a new product line or investing in advanced techniques of production. Major expenditures such as those on advertising campaign or research and development programme having long term implications for the firm are also examples of capital budgeting decisions. …” |