Which of the following statements about the investment decision is NOT correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Capital budgeting decisions normally involve small amounts of investment.
Option (1) A long-term investment decision is also called a capital budgeting decision. — True. It commits funds for a long period, for example buying a new machine or opening a new branch.
Option (2) Capital budgeting decisions are irreversible except at a huge cost. — True. Once made, such a decision is very hard to undo. So it must be taken with great care.
Option (3) Short-term investment decisions are concerned with the levels of cash, inventory and receivables. — True. These are also called working capital decisions. They affect the day-to-day working of the business.
Option (4) Capital budgeting decisions normally involve small amounts of investment. — False. Capital budgeting decisions normally involve huge amounts of investment. Examples are buying a new machine or opening a new branch.
NCERT (2026-27 Edition): “Investment Decision … Investment decision can be long-term or short-term. A long-term investment decision is also called a Capital Budgeting decision. It involves committing the finance on a long-term basis. For example, making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch, etc. These decisions are very crucial for any business since they affect its earning capacity in the long run. The size of assets, profitability and competitiveness are all affected by capital budgeting decisions. Moreover, these decisions normally involve huge amounts of investment and are irreversible except at a huge cost. Therefore, once made, it is often almost impossible for a business to wriggle out of such decisions. Therefore, they need to be taken with utmost care. …” “Investment Decision … Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables. These decisions affect the day-to-day working of a business. These affect the liquidity as well as profitability of a business. Efficient cash management, inventory management and receivables management are essential ingredients of sound working capital management.” |