Question

Manish Ltd. Is planning to modernize its plant and machinery.

(i) Name this kind of investment decision.

(ii) Explain any three factors affecting the investment decision.

(iii) Which kind of market is feasible for this organization ?

(iv) How can securities be floated in such a market?

Answer 1

(i) Capital budgeting decision: A long-term investment decision is called a capital budgeting decision.

(ii) The three factors affecting the investment decision are :

(a) Cash flows of the project :

• When company takes an investment decision involving huge amount it expects to generate some cash flows over a **.
• These cash flows are in the form of a series of cash receipts and payments over the life of an investment.
• The amount of these cash flows should be carefully analyzed before considering a capital budgeting decision.

(b) The rate of return :

• The most important criterion is the rate of return of the project.
• These calculations are based on the expected return from each proposal and the assessment of risk involved.
• Suppose, there are two projects A and B (with the same risk involved) with a rate of return of 12 per cent and 15 per cent, respectively, then under normal circumstances project B will be selected.

(c) The investment criteria involved:

• The decision to invest in a particular project involves a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return.
• There are different techniques to evaluate investment proposals which are known as capital budgeting techniques. These techniques are applied to each proposal before selecting a particular project.