Consider the following statements about the investment decision:
(A) A long-term investment decision is also called a capital budgeting decision.
(B) The size of assets, profitability and competitiveness are all affected by working capital decisions.
(C) Short-term investment decisions affect the liquidity as well as the profitability of a business.
(D) A wrong capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (D) only
(A) A long-term investment decision is also called a capital budgeting decision. — Correct. It commits funds for a long period, for example a new machine, a new fixed asset or a new branch.
(B) The size of assets, profitability and competitiveness are all affected by working capital decisions. — Incorrect. These are affected by capital budgeting decisions. Long-term investment changes the asset base and the earning capacity of the business for years.
(C) Short-term investment decisions affect the liquidity as well as the profitability of a business. — Correct. These are working capital decisions about the levels of cash, inventory and receivables. They affect the day-to-day working, and so both liquidity and profit.
(D) A wrong capital budgeting decision normally has the capacity to severely damage the financial fortune of a business. — Correct. Such decisions involve huge amounts and are irreversible except at a huge cost, so a mistake is hard to undo.
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. These decisions must be taken by those who understand them comprehensively. A wrong capital budgeting decision normally has the capacity to severely damage the financial fortune of a business. Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables. These decisions affect the day-to-day working of a business. These affect the liquidity as well as profitability of a business. Efficient cash management, inventory management and receivables management are essential ingredients of sound working capital management.” |