Capital Budgeting Concepts: Identifying the False Statement
The question asks to identify the statement about capital budgeting that is incorrect. Let's analyze each option:
Option Analysis
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Option 1: The opportunity cost of an input is considered in capital budgeting
This statement is TRUE. Capital budgeting involves evaluating the best use of resources. If an existing asset (input) is used for a new project, the potential income from using it elsewhere (its opportunity cost) must be considered as part of the project's cost.
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Option 2: Capital budgeting decisions are reversible in nature
This statement is FALSE. Capital budgeting decisions typically involve substantial, long-term investments in assets like property, plant, and equipment. These decisions are often difficult, costly, and sometimes impossible to reverse once made. They are fundamentally different from short-term operational decisions.
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Option 3: Cash flows and accounting profits are different
This statement is TRUE. Capital budgeting relies heavily on analyzing relevant cash flows (actual cash inflows and outflows), not accounting profits. Accounting profits can include non-cash expenses (like depreciation) and follow accrual principles, making them less suitable for investment appraisal than cash flows.
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Option 4: An expansion decision is a capital budgeting decision
This statement is TRUE. Decisions to expand operations, such as building new facilities or increasing production capacity, require significant investment over multiple periods and are core examples of capital budgeting decisions.
Conclusion
Based on the analysis, the statement that capital budgeting decisions are reversible is false because they represent major, long-term commitments that are generally irreversible.
Important Questions from Capital budgeting decisions
Zero Based Budgeting (ZBB) lays emphasis on:
A. Allocation of resources based on cost-benefit terms
B. Unlimited deficit financing
C. Preparing a new budget right from the scratch
D. Preparing the budget, neglecting the history of expenditure
Choose the correct answer from the options given below:
Under which of the following situations the decision outcome on evaluation of investment opportunities vary under NPV and IRR methods per se?
a) Time disparity
b) Cost disparity
c) Life disparity
d) Volume disparity
Choose the correct combination of situations:
Which one of the following methods of Capital Budgeting assumes that cash-inflows are reinvested at the project’s rate of return ?
Which of the following variables is not known in Internal Rate of Return methods of capital budgeting?
Indicate the correct code for discounted cash flow techniques for capital investment proposals from the following:
(i) Net Present Value Method
(ii) Internal Rate of Return method
(iii) Excess Benefit-Cost Ratio method
(iv) Net Terminal Value method
Choose the correct answer from the code given below :
