Which of the following factor will affect Capital Budgeting Decision?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Investment criteria involved

A capital budgeting decision is a long-term investment decision, such as buying a new machine or opening a new branch. Three factors affect it: cash flows of the project, the rate of return, and the investment criteria involved. Investment criteria means the calculations of the amount, interest rate, cash flows and returns used to judge a project.

Option (1) Shareholder’s preference — Incorrect. This affects the dividend decision, not the capital budgeting decision.
Option (2) Stability of dividends — Incorrect. This also affects the dividend decision.
Option (3) Taxation policy — Incorrect. Taxation policy is a factor that affects the dividend decision.
Option (4) Investment criteria involved — Correct. It is one of the factors that affect the capital budgeting decision.

NCERT (2026-27 Edition): “(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. …”

“(c) Stability of Dividends: Companies generally follow a policy of stabilising dividend per share. …”

“(f) Shareholders’ Preference: While declaring dividends, managements must keep in mind the preferences of the shareholders in this regard. …”

“(g) Taxation Policy: The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains. …”