The management of fixed capital or investment or capital budgeting decisions are important because they are:
A. Short term decisions
B. Long term decisions
C. Reversible decisions
D. Irreversible decisions
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → B and D only
Capital budgeting decisions are decisions to invest in fixed assets, such as a new machine or a new branch.
(A) Short term decisions — Incorrect. Fixed assets are used for many years. Decisions about short-term assets such as cash and stock belong to working capital management.
(B) Long term decisions — Correct. They affect the earning capacity of the business in the long run, as well as its size, profitability and competitiveness.
(C) Reversible decisions — Incorrect. Once the money is spent on a project, it cannot be taken back without a heavy loss.
(D) Irreversible decisions — Correct. They involve huge amounts and can be reversed only at a huge cost. So they must be taken with great care.
NCERT (2026-27 Edition): “Investment Decision … 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. …” |