Which of the following is an important factor to be considered in long-term investment decisions?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rate of Return
A long-term investment decision (capital budgeting decision) is a decision to put money into fixed assets or big projects. Its effect lasts for many years.
Option (1) Control Consideration — Incorrect. Control is a factor in the choice of capital structure (debt or equity). Issuing new equity may reduce the hold of the present owners. It is not a factor in choosing a project.
Option (2) Stability of Earnings — Incorrect. This is a factor of the dividend decision. A company with stable earnings can pay higher dividends.
Option (3) Contractual Constraints — Incorrect. This is also a dividend factor. A lender may put limits on the payment of dividends.
Option (4) Rate of Return — Correct. The most important criterion in a capital budgeting decision is the rate of return of the project. If two projects carry the same risk, the one with the higher return is chosen.
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.” “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.” “Stability Earnings: Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. …” “Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. …” “Control: Debt normally does not cause a dilution of control. A public issue of equity may reduce the managements’ holding in the company and make it vulnerable to takeover. This factor also influences the choice between debt and equity especially in companies in which the current holding of management is on a lower side.” |