Altros Ltd. dealing in ready made garments, is planning to expand its business operations in order to cater to international market. For this purpose, the company needs additional Rs. 80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long-term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing Debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Instead of issuing 10% Debenture the company can issue Equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.
What is the other name of long-term investment decision?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Capital budgeting
Option (1) Capital budgeting — Correct. A long-term investment decision is called capital budgeting. It commits large funds to fixed assets, such as Altros’s new machinery, for many years. Such decisions affect the firm’s earning capacity in the long run and are costly to reverse.
Option (2) Gross working capital — Incorrect. Gross working capital is the total of a firm’s current assets, such as stock, debtors and cash. It is short-term, not a long-term decision.
Option (3) Financial management — Incorrect. Financial management is the whole task of raising and using funds well. The investment decision is only one of its three decisions.
Option (4) Working capital — Incorrect. Working capital decisions are short-term investment decisions, about current assets, not about machinery used for years.
Note: The passage is built on the NCERT exercise case study of Sunrises Ltd. in the chapter ‘Financial Management’, which has been reproduced in the exam.
NCERT (2026-27 Edition): “Investment Decision A firm’s resources are scarce in comparison to the uses to which they can be put. A firm, therefore, has to choose where to invest these resources, so that they are able to earn the highest possible return for their investors. The investment decision, therefore, relates to how the firm’s funds are invested in different assets.” “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. …” |