Identify the factors affecting Capital Budgeting decision :
(A) Cash flows of the project
(B) Rate of return of the project
(C) Stability of Dividend
(D) State of Capital Market
(E) Investment Criteria involved
Choose the correct answer from the options given below :
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (B) and (E) only
(A) Cash flows of the project — A factor affecting capital budgeting (Correct). Capital budgeting decisions are investment decisions about long-term assets, such as a new plant. The expected cash receipts and payments of the project must be studied before deciding.
(B) Rate of return of the project — A factor affecting capital budgeting (Correct). It is the most important criterion. The project with the higher return is chosen.
(C) Stability of Dividend — Not a factor of capital budgeting (Incorrect). It affects the dividend decision.
(D) State of Capital Market — Not a factor of capital budgeting (Incorrect). It affects the financing decision, that is, the choice of source of funds.
(E) Investment Criteria involved — A factor affecting capital budgeting (Correct). Capital budgeting techniques are used to compare the investment proposals.
NCERT (2026-27 Edition): “Investment 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.” “(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 amount of these cash flows should be carefully analysed before considering a capital budgeting decision.” “(b) The rate of return: The most important criterion is the rate of return of the project. These calculations are based on the expected returns from each proposal and the assessment of the risk involved. …” “(c) 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. …” “(g) 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. …” “(c) Stability of Dividends: Companies generally follow a policy of stabilising dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. …” |