Which of the following factors doesn't affect the capital budgeting decisions?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → State of capital market
Capital budgeting means deciding which long-term assets or projects to invest in. Its factors judge the project itself.
Option (1) Cash flows of the project — A factor affecting capital budgeting (Incorrect). A project is judged by the cash receipts and payments it will bring over its life.
Option (2) The rate of return — A factor affecting capital budgeting (Incorrect). The return each project is expected to earn, weighed against its risk, is compared before one is chosen.
Option (3) The investment criteria involved — A factor affecting capital budgeting (Incorrect). Each proposal needs calculations of the amount invested, the interest rate, the cash flows and the rate of return. The capital budgeting techniques are used to make them.
Option (4) State of capital market — Not a factor affecting capital budgeting (Correct). It is a factor in the financing decision. When the stock market is rising, more people invest in shares, so equity is easier to raise. It decides where the money comes from, not which project it goes into.
NCERT (2026-27 Edition): “Factors affecting Capital Budgeting Decision … There are certain factors which affect capital budgeting decisions. (a) Cash flows of the project: When a company takes an investment decision involving huge amount it expects to generate some cash flows over a period. These cash flows are in the form of a series of cash receipts and payments over the life of an investment. …” “The rate of return: The most important criterion is the rate of return of the project. …” “The investment criteria involved: The decision to invest in a particular project involves a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return. There are different techniques to evaluate investment proposals which are known as capital budgeting techniques. …” “State of Capital Market: Health of the capital market may also affect the choice of source of fund. During the period when stock market is rising, more people invest in equity. …” |