Which of the following statements is true?

Solution

Capital budgeting decisions involve evaluating and selecting long-term investment projects or expenditures that can impact the company's future. These decisions typically involve significant financial outlays and have long-term consequences for the organization. Examples of capital budgeting decisions include investing in new machinery, expanding production facilities, or acquiring another company. Option a is incorrect because purchasing raw material for the factory is an example of an operating or short-term decision related to day-to-day operations rather than a capital budgeting decision. Option c is incorrect because capital budgeting decisions have a direct impact on the future profitability of the firm. These decisions involve assessing the potential returns, cash flows, and risks associated with investments, with the aim of enhancing future profitability. Option d is incorrect because capital budgeting decisions are generally not reversible in nature. Once a significant investment is made, it can be challenging to reverse the decision or recover the invested funds easily. Therefore, careful analysis and evaluation are crucial before making capital budgeting decisions. Therefore, the true statement is ‘Capital budgeting decisions are long-term decisions’.