Multiple Choice
Which of the following is considered a good cash management practice when making inventory purchases?
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7. Receivables and Investments
Introduction to Investments in Securities
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Capital budgeting decisions are risky because all of the following are true except:
A
Future cash flows are uncertain.
B
They often involve large amounts of capital.
C
They have long-term implications for the firm.
D
They can be easily reversed without significant cost.
Verified step by step guidance1
Understand the concept of capital budgeting: Capital budgeting involves evaluating and selecting long-term investment projects, such as purchasing equipment or expanding operations. These decisions are critical because they impact the firm's future profitability and financial health.
Identify the risks associated with capital budgeting: Risks include uncertainty in future cash flows, the large amounts of capital required, and the long-term implications for the firm. These factors make capital budgeting decisions complex and risky.
Analyze the statement 'They can be easily reversed without significant cost': This is incorrect because capital budgeting decisions typically involve significant investments that are difficult to reverse without incurring substantial costs. For example, selling specialized equipment or canceling a construction project can lead to financial losses.
Compare the incorrect statement with the other options: The other options correctly describe the risks of capital budgeting, such as uncertainty in cash flows, large capital requirements, and long-term implications. These are valid reasons why capital budgeting decisions are risky.
Conclude why the correct answer is 'They can be easily reversed without significant cost': This statement does not align with the nature of capital budgeting decisions, which are generally irreversible or costly to reverse. Therefore, it is the exception among the listed options.
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