CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

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

Capital budgeting decisions involve large outlays that are generally irreversible and shape the firm's long-term profitability and risk. Unlike working capital decisions, they are not easily undone without loss, they influence many future years, and they depend on forecasts of future cash flows.

AThey are usually easily reversed without any loss
BThey involve large outlays that are generally irreversible and affect the firm's long-term profitabilityCorrect
CThey affect only the current year's profit
DThey require no estimate of future cash flows

Explanation

Capital expenditure decisions commit substantial funds for long periods and are difficult to reverse without loss, which affects long-term earning capacity and risk. The other options are untrue: they are not easily reversed, they affect many years, and they depend heavily on estimated future cash flows.

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