Which of the following is NOT concerned with the long-term investment decision of a business?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Deciding the level of inventory to be kept
Option (1) Replacing an existing machine with a new one — A long-term investment decision. Funds are committed to a fixed asset for many years. Investing in a new machine to replace an existing one is a standard capital budgeting example.
Option (2) Deciding the level of inventory to be kept — Not a long-term investment decision. This is a short-term investment decision, also called a working capital decision. It deals with the levels of cash, inventory and receivables, which affect the day-to-day working of a business.
Option (3) Spending on a research and development programme — A long-term investment decision. Major spending on research and development has long-term implications for the firm. So it is a capital budgeting decision.
Option (4) Spending on a major advertising campaign — A long-term investment decision. A major advertising campaign is paid for now but shapes the business for years. So it is also counted as a capital budgeting decision.
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. …” “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.” “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. …” |