Question

Radha is an enterprising businesswoman who has been running a fishery for the past ten years. She has saved 10 Lakhs from her business. She shared with her family her desire to utilize this money to expand her business. Her family members gave her different suggestions like buying new machinery to replace the existing one, acquiring altogether new equipment with latest technology, opening a new branch of the fishery in another village and so on. Since these decisions are crucial for her business, involve huge amount of money and are irreversible except at huge cost, Radha wants to analyze all aspects of the decision,before taking any step.
(i) Identify and explain the financial decision to be taken by Radha.
(ii) Also explain briefly any two factors that affect this decision.

Answer 1

(i) Investment decision/ Capital budgeting decision Investment/ Capital budgeting decision involves deciding about how the funds are invested in different assets so that they are able to earn the highest possible return for their investors.
(ii) Factors that affect capital budgeting decision are:
(a) Cash flows of the project
(b) Rate of return of the project.
(c) Investment criteria.