Question

Sudha is an enterprising business woman who has been running a poultry farm for the past ten years. She has saved Rs. Four Lakhs for 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 equipments with latest technology, opening a new branch of the poultry farm in another city and so on. Since these decisions are crucial for her business, involve a huge amount of money and are irreversible except at a huge cost Sudha wants to analyze all aspects of the decisions, before taking any final decision
(i) Identify and explain the financial decision to be taken by Sudha
(ii) Also,explain briefly the factors that will 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 captial budgeting
(a) Cash flows of the project
(b) Rate of return of the project
(c) Investment criteria