A company plans to replace an existing machine with a new machine. This is a..................

Capital budgeting decision

The correct answer is Option (4) - Capital budgeting decision.

The decision to replace an existing machine with a new machine is a capital budgeting decision as it includes a heavy investment for the long term.

Fixed capital refers to investment in long-term assets. Management of fixed capital involves the allocation of a firm’s capital to different projects or assets with long-term implications for the business. These decisions are called investment decisions or capital budgeting decisions and affect the growth, profitability, and risk of the business in the long run. These long-term assets last for more than one year.

* 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. Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets.

* 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.