Which among the following is a factor affecting Capital Budgeting Decision?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The rate of return
Option (1) Floatation costs — Incorrect. The cost of raising money from the public affects the financing decision, because it makes one source costlier than another.
Option (2) Taxation policy — Incorrect. The rate of tax on dividends affects the dividend decision, that is, how much profit to give out.
Option (3) Flexibility — Incorrect. Keeping room to raise more money later is a point to consider while choosing the capital structure. That too is a financing matter.
Option (4) The rate of return — Correct. The capital budgeting or investment decision puts the firm’s money into long-term assets, so its factors are those that show whether the proposal will pay. If two projects carry the same risk, the firm takes the one that promises the higher return. The expected return is therefore the first test a proposal must pass. It is one of the three factors that affect this decision, the other two being the cash flows of the project and the investment criteria applied.
NCERT (2026-27 Edition): “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.” “(b) The rate of return: The most important criterion is the rate of return of the project. …” |