Altros Ltd. dealing in ready made garments, is planning to expand its business operations in order to cater to international market. For this purpose, the company needs additional Rs. 80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long-term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing Debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Instead of issuing 10% Debenture the company can issue Equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.
A decision for replacing machines with modern machinery of higher production capacity is a:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Investment decision
Option (1) Investors decision — Incorrect. Financial management has three decisions: investment, financing and dividend. There is no “investors decision” among them.
Option (2) Financing decision — Incorrect. A financing decision is about how the money is raised, for example through debentures or equity shares. The passage comes to that later, and it is a separate question.
Option (3) Dividend decision — Incorrect. A dividend decision is about how much of the profit is paid to shareholders and how much is kept in the business. Replacing machines has nothing to do with sharing profit.
Option (4) Investment decision — Correct. An investment decision is about where the firm’s funds are put, meaning which assets it buys. Altros is spending Rs. 80 lakh on modern machinery of higher capacity. The funds are committed for a long period and will affect the company’s earning capacity for years. This is a long-term investment decision, also called capital budgeting.
Note: The passage is built on the NCERT exercise case study of Sunrises Ltd. in the chapter ‘Financial Management’. In the exam, the company is renamed Altros Ltd., and a few lines are added: that the funds are committed for the long term, that the company could issue equity shares instead of debentures, and that the finance manager would choose the cheapest source. NCERT’s own question on this case asks whether issuing debentures is a rational decision. Its answer is no, because the cost of debt (10%) is more than the return on investment (8%). Read NCERT thoroughly, including the case studies in the exercises. 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. …” |