Business Studies

Business Finance

Medium

'Laxmi Enterprise' is a textile manufacturing firm. It has been consistently earning good profits for many years. This year, too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in the future. Now they wished to diversify their business. The CEO of Laxmi Enterprise is considering two options, either to diversify into manufacturing cosmetics or switches. So they wanted to purchase land, to set up a manufacturing unit in the backward area of Assam, which would lead to the generation of employment opportunities in the area, but only after fulfilling all legal requirements and taking appropriate steps to ensure that the environment was not polluted. The finance manager of the company, Mr. Vikrant was asked by the management to prepare a report on the factors that should be considered while making their decisions.

Identify the incorrect statement related to the decision of investing in a land by the company, from the options given below:

These decisions have a bearing on the long term growth.

These decisions influence the overall business risk complexion of the firm.

These decisions are reversible.

These decisions result in a substantial portion of capital funds being blocked in long term project.

✅ Correct Option: 3

Option 1 -> Statement 1 is correct because land investment decisions are capital budgeting decisions that significantly impact the company's long-term growth trajectory and strategic expansion plans.

Option 2 -> Statement 2 is correct because investing in land affects the firm's overall risk profile by committing substantial resources to a long-term asset with uncertain future returns and market volatility.

Option 3 -> Statement 3 is incorrect because land investment decisions are NOT reversible - they are typically irreversible or very difficult to reverse without significant losses, as land is an illiquid asset that cannot be easily converted back to cash.

Option 4 -> Statement 4 is correct because land purchases require substantial capital outlay that remains locked in for extended periods, reducing the firm's liquidity and financial flexibility.

Hence, Option 3 -> Statement 3 claims these decisions are reversible, which is fundamentally wrong. Capital budgeting decisions like land investment are characterized by their irreversibility - once made, they cannot be easily undone without incurring significant costs or losses. Land is an illiquid asset that ties up capital for the long term -> correct

Question 47

The decision considered by the management in the above case is related to:

Question 48

Which of the following decision is being considered by the management in the above case?

Question 49

Which of the following is not affected by the decision being considered by the management?

Question 50

Which of the following is not a factor affecting the important decision being discussed in the passage above?

Identify the incorrect statement related to the decision of investing in a land by the company, from the options given below:

Solution

More from this set:

Keyboard Shortcuts

CUET Business Studies Past Year Questions (Topic-Wise)