Which of the following statements about the investment decision is NOT correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → The investment decision relates to how much of the profit earned is to be retained in the business.
Option (1) A firm’s resources are scarce in comparison to the uses to which they can be put. — Correct about the investment decision. A firm has limited funds and many uses for them. This is why it must choose.
Option (2) A firm has to choose where to invest its resources so that they earn the highest possible return for its investors. — Correct about the investment decision. The investment decision picks the uses that give the highest return.
Option (3) The investment decision relates to how much of the profit earned is to be retained in the business. — Not correct about the investment decision. How much profit to keep back and how much to pay out is the dividend decision. The investment decision relates to how the firm’s funds are invested in different assets.
Option (4) A firm’s investment decision can be long-term or short-term. — Correct about the investment decision. The long-term kind is capital budgeting and the short-term kind is working capital.
NCERT (2026-27 Edition): “Investment Decision A firm’s resources are scarce in comparison to the uses to which they can be put. A firm, therefore, has to choose where to invest these resources, so that they are able to earn the highest possible return for their investors. The investment decision, therefore, relates to how the firm’s funds are invested in different assets. …” “Dividend Decision The third important decision that every financial manager has to take relates to the distribution of dividend. Dividend is that portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business. …” |