Given below are two statements:
Assertion (A): Decisions about fixed capital have a bearing on the long-term growth of a business.
Reason (R): The funds invested in long-term assets are likely to yield returns in the future, which affect the future prospects of the business.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): Decisions about fixed capital have a bearing on the long-term growth of a business. — True. Fixed capital decisions commit funds to long-term assets, so they shape the long-term growth of the business.
Reason (R): The funds invested in long-term assets are likely to yield returns in the future, which affect the future prospects of the business. — True. Plant, machinery and buildings earn their returns over many future years, not at once.
Why R explains A?
R says the money put into long-term assets earns its returns in the future. So what the business earns in later years depends on these fixed capital choices. Because those future earnings decide how far the business can grow, fixed capital decisions bear on its long-term growth.
NCERT (2026-27 Edition): “Management of Fixed Capital … Investment in these assets would also include expenditure on acquisition, expansion, modernisation and their replacement. These decisions include purchase of land, building, plant and machinery, launching a new product line or investing in advanced techniques of production. Major expenditures such as those on advertising campaign or research and development programme having long term implications for the firm are also examples of capital budgeting decisions. The management of fixed capital or investment or capital budgeting decisions are important for the following reasons:” “(i) Long-term growth: These decisions have bearing on the long-term growth. The funds invested in long-term assets are likely to yield returns in the future. These will affect the future prospects of the business.” |