Saksham Ltd., a firm manufacturing textile, wished to diversify their

1.	Saksham Ltd., a firm manufacturing textile, wished to diversify their business. They were considering two options, either to diversify into manufacturing tooth-paste or switches. They wanted to invest in the purchase of land, to set up a manufacturing unit in the backward areas of Gujarat, which would also 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. Ramakant was asked by the management to prepare a report on the factors which should be considered while making the above investment decision. 1. State any two factors that Mr. Ramakant would give in his report. 2. Also state reasons which make it important for the above decision to be made carefully.
Answer» (A) Following are the factors that should be kept in mind by the company while making the investment decision : 1. Cash flows of the project – The financial manager should carefully analyse the amount of cash flows i.e., cash receipts and payments over the life of investment before considering a capital budgeting decision. 2. Rate of return – The financial manager should calculate the expected returns from each proposal and risk involved. 3. Investment criteria – The financial manager should evaluate investment proposals by applying capital budgeting techniques. These techniques involve a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return. (B) The following are the reasons that make the above decision to be made carefully : 1. These decisions have a bearing on the long-term growth. 2. These decisions result in a substantial portion of capital funds being blocked in long-term project. 3. These decisions influence the overall business risk complexion of the firm. 4. These decisions once taken, are not reversible without incurring heavy losses.

Saksham Ltd., a firm manufacturing textile, wished to diversify their business. They were considering two options, either to diversify into manufacturing tooth-paste or switches. They wanted to invest in the purchase of land, to set up a manufacturing unit in the backward areas of Gujarat, which would also 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. Ramakant was asked by the management to prepare a report on the factors which should be considered while making the above investment decision. 1. State any two factors that Mr. Ramakant would give in his report. 2. Also state reasons which make it important for the above decision to be made carefully.

Answer»

(A) Following are the factors that should be kept in mind by the company while making the investment decision :

1. Cash flows of the project – The financial manager should carefully analyse the amount of cash flows i.e., cash receipts and payments over the life of investment before considering a capital budgeting decision.

2. Rate of return – The financial manager should calculate the expected returns from each proposal and risk involved.

3. Investment criteria – The financial manager should evaluate investment proposals by applying capital budgeting techniques. These techniques involve a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return.

(B) The following are the reasons that make the above decision to be made carefully :

1. These decisions have a bearing on the long-term growth.

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

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

4. These decisions once taken, are not reversible without incurring heavy losses.

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