Purchasing a new machine to replace an existing one is an example of which of the following decision?

Capital budgeting decision

The correct answer is option 2- Capital budgeting decision.

Purchasing a new machine to replace an existing one is an example of Capital budgeting decision.

A long-term investment decision is also called a Capital Budgeting decision. Investment in a new machinery is a capital budgeting 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. These decisions must be taken by those who understand them comprehensively. A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.