Read the following passage carefully and answer the questions given below.
'Laxmi Enterprise' is a textile manufacturing firm. It has been consistently earning good profits for many years. This year, too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in the future. Now they wished to diversify their business. The CEO of Laxmi Enterprise is considering two options, either to diversify into manufacturing cosmetics or switches. So they wanted to purchase land, to set up a manufacturing unit in the backward area of Assam, which would lead to the generation of employment opportunities in the area, but only after fulfilling all legal requirements and taking appropriate steps to ensure that the environment was not polluted. The finance manager of the company, Mr. Vikrant was asked by the management to prepare a report on the factors that should be considered while making their decisions.
Which of the following is not affected by the decision being considered by the management?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Interest payment on old debts
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Size of assets → Affected, because purchasing new land and setting up a new unit will increase the firm’s total assets.
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Profitability → Affected, as diversification into a new business line (cosmetics or switches) will influence future profits depending on success.
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Cash flows → Affected, since investing in land and setting up the plant requires a large outflow of cash, and future operations will affect inflows.
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Interest payment on old debts → Not affected, because this is a fixed obligation based on previous borrowings. It remains the same regardless of whether the company diversifies or not.