Consider the following statements about the factors affecting the cap…

Consider the following statements about the factors affecting the capital budgeting decision:

(A) The cash flows of a project are in the form of a series of cash receipts and payments over the life of the investment.

(B) The amount of the cash flows of a project should be carefully analysed after the capital budgeting decision is taken.

(C) The calculations of the rate of return of a project are based on the expected returns from each proposal and the assessment of the risk involved.

(D) The most important criterion in a capital budgeting decision is the cash flows of the project.

Which of the statements given above are correct?

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → (A) and (C) only

(A) The cash flows of a project are in the form of a series of cash receipts and payments over the life of the investment. — Correct. A project brings cash in and takes cash out all through its life. So its cash flows come as a series of receipts and payments.

(B) The amount of the cash flows of a project should be carefully analysed after the capital budgeting decision is taken. — Incorrect. The cash flows are studied before the decision is considered. Once a huge amount is invested, it is too late to check whether the project pays.

(C) The calculations of the rate of return of a project are based on the expected returns from each proposal and the assessment of the risk involved. — Correct. The rate of return is worked out from the expected returns of each proposal and its risk. Between two projects of the same risk, the one with the higher return is chosen.

(D) The most important criterion in a capital budgeting decision is the cash flows of the project. — Incorrect. The most important criterion is the rate of return of the project. Cash flows are a separate factor that must be studied, but they do not rank first.

NCERT (2026-27 Edition): “Factors affecting Capital Budgeting Decision … (a) Cash flows of the project: When a company takes an investment decision involving huge amount it expects to generate some cash flows over a period. These cash flows are in the form of a series of cash receipts and payments over the life of an investment. The amount of these cash flows should be carefully analysed before considering a capital budgeting decision.
(b) 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.”