CBSE Class 12 Business Studies 2019 Outside Delhi set 1

'G. Motors' is the manufacturer of sophisticated cranes. The Production Manager of the company, reported to the Chief Executive Officer, Ashish Jain that one of the machines used in manufacturing sophisticated cranes had to be replaced to compete in the market, as other competitors were using automatic machines for manufacturing cranes. After a detailed analysis, it was decided to purchase a new automatic machine having the latest technology. It was also decided to finance this machine through long term sources of finance. Ashish Jain compared various machines and decided to invest in the machine which would yield the maximum returns to its investors.

Question : 19

Total: 44

Explain any three factors affecting the decision identified in (a) above.

Solution:

Factors affecting capital budgeting decision include:
(i) Cash flow of the project: 'G.Motors' should expect a regular amount of cash flow through investments in the new automatic machines with latest technology to meet the daily requirements of their operations.
(ii) Returns from investment: The selection of new machines requiring investments is identified based on possible benefits or returns which G . Motors will obtain through an appropriate appraisal method.
(iii) Investment criteria: The investment proposal on purchase of new machines is prepared on the basis of availability of raw materials, labour, etc., along with the extent of risks and uncertainties associated.

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