In a capital budgeting decision, the series of cash receipts and paym…

In a capital budgeting decision, the series of cash receipts and payments expected over the life of an investment is studied under which factor?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Cash flows of the project

Option (1) Cash flows of the project — Correct. A large investment brings money in and out over many years. This series of cash receipts and payments over the life of the investment forms the cash flows of the project. They are studied with care before the decision is taken.

Option (2) Cash flow position of the company — Incorrect. This is a factor of the financing decision. A stronger cash flow position may make debt financing more viable than equity.

Option (3) Rate of return — Incorrect. This is the expected return of each proposal, judged with its risk. Of two projects with the same risk, the one with the higher rate of return is chosen. It ranks projects by their return; it is not the series of receipts and payments itself.

Option (4) Investment criteria involved — Incorrect. These are the calculations and the capital budgeting techniques applied to each proposal. They cover the amount invested, the interest rate, the cash flows and the rate of return. It is the method of evaluating proposals; cash flows are only one input to it.

NCERT (2026-27 Edition): “Factors affecting Capital Budgeting 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. Suppose, there are two projects, A and B (with the same risk involved), with a rate of return of 10 per cent and 12 per cent, respectively, then under normal circumstance, project B should be selected.
(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. These techniques are applied to each proposal before selecting a particular project.”

In a capital budgeting decision, the series of cash receipts and payments expected over the life of an investment is studied under which factor?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Cash flows of the project

Option (2) Cash flow position of the company — Incorrect. This is a factor of the financing decision. A stronger cash flow position may make debt financing more viable than equity.