A firm has only one project available to invest in. How is the viability of this project judged?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → By its rate of return and its comparability with the industry’s average.
Option (1) By its cash flows and their comparability with the firm’s past record. — Incorrect. Cash flows must be analysed carefully before any capital budgeting decision. But a single project’s viability is judged by its rate of return, and it is compared with the industry’s average.
Option (2) By its rate of return and its comparability with the firm’s past record. — Incorrect. The measure is right, but the comparison is wrong. The rate of return is compared with the industry’s average, which shows how the project stands against other firms.
Option (3) By its cash flows and their comparability with the industry’s average. — Incorrect. The comparison is right, but the measure is wrong. Cash flows are one factor of the decision, while viability is seen in terms of the rate of return.
Option (4) By its rate of return and its comparability with the industry’s average. — Correct. With several projects, a firm picks the one with the best return. With only one project, there is nothing inside the firm to compare it with. So its rate of return is compared with the industry’s average.
NCERT (2026-27 Edition): “Factors affecting Capital Budgeting Decision A number of projects are often available to a business to invest in. But each project has to be evaluated carefully and, depending upon the returns, a particular project is either selected or rejected. If there is only one project, its viability in terms of the rate of return, viz., investment and its comparability with the industry’s average is seen. There are certain factors which affect capital budgeting decisions. |