“A capital budgeting decision is c | Class 12 Business Studies Chapter Financial Management, Financial Management NCERT Solutions

Question:

“A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer?

Answer:

Yes, a capital budgeting decision is capable of changing the financial fortunes of a business. Investment decision involves careful selection of assets in which funds are to be invested. Decisions relating to investment in fixed assets are known as capital budgeting decision, whereas, those concerning investment in current assets are called working capital decisions.

A business needs to invest funds for setting up new business, for expansion and modernization. Investment decision is taken after careful scrutiny of available alternatives in terms of costs involved and expected return.

These decisions are very crucial for any business. Earning capacity of the fixed assets of a firm, profitability and competitiveness, all are affected by the capital budgeting decisions. Moreover, these decisions normally involve huge amount of investment and are irreversible, except at a huge cost.

Following are the factors that highlight the importance of capital budgeting decisions.

  1. These are long-term decisions and can be reserved only at huge costs.
  2. These generally involve commitment of huge funds.
  3. These have a significant effect on the profitability and future of the business.

Thus, once these decisions are taken, it is impossible for a firm to undo these decisions and certainly a bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.


Study Tips for Answering NCERT Questions:

NCERT questions are designed to test your understanding of the concepts and theories discussed in the chapter. Here are some tips to help you answer NCERT questions effectively:

  • Read the question carefully and focus on the core concept being asked.
  • Reference examples and data from the chapter when answering questions about Financial Management.
  • Review previous year question papers to get an idea of how such questions may be framed in exams.
  • Practice answering questions within the time limit to improve your speed and accuracy.
  • Discuss your answers with your teachers or peers to get feedback and improve your understanding.

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Welcome to the NCERT Solutions for Class 12 Business Studies - Chapter . This page offers a step-by-step solution to the specific question from Excercise 3 , Question 3: “A capital budgeting decision is capable of changing the financial fortunes of a business.&rdq....