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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Which feature makes capital budgeting decisions different from routine working capital decisions?

Capital budgeting decisions commit large funds for a long period and are mostly irreversible, so a wrong decision can be very costly and affect the firm's long-term survival. Working capital decisions, by contrast, are short-term and more easily adjusted.

  1. AThey are easily reversed without any loss if conditions change
  2. BThey involve long-term commitment of funds and are largely irreversible, so errors are costlyCorrect
  3. CThey affect only the current year's profit
  4. DThey never involve any risk because returns are certain

Explanation

Capital expenditure decisions tie up substantial funds for long periods and cannot be reversed without heavy loss. Hence mistakes can threaten the firm's survival. The other options contradict this: the effect is long-term and returns are uncertain.

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