Question

Investment decision can be long-term. Explain long term investment decision and state any two factors affecting this decision.

Answer 1

Long-term investment decision is referred to as the capital budgeting decision. It relates to the investment in fixed assets e.g. buying a new machine. Befoje taking the final decision the finance manager makes a comparative study of various alternatives available in the market on the basis of their cost and profitability.

These decisions are very important as they affect the earnings of the business in the long-run.

Factors affecting long-term investment decision are:

(i) Cash flow of the project Cash flow of the project during the life of an investment affects the long-term investment decision.

Series of cash receipts and payments over the life of an investment has to be carefully analysed before taking a capital budgeting decision. .

(ii) Rate of return of the project The most important criterion is the rate of return of the project. Investment yields return in future. Thus, calculation of returns is necessary to analyse the best project.

(iii) Risk involved With every investment proposal, there is some degree of risk involved. The company must try to calculate the risk involved in every proposal and select a proposal with moderate degree of risk only.