Question

The demand for take away food business is increasing day-by-day. People working in multi-national companies have to work till night very often and they are reluctant to cook food. Taking advantage of this opportunity, Amit and Bijoy started ‘Langar’, a take away food business. The food became famous because of its good quality and standards of hygiene followed by them. Over the years, the business became very profitable. They decided to expand the business by opening more branches in different cities. To ensure consistent food quality at all branches and to maintain the hygiene and quality they planned to import machines with advanced technology. The cost of each machine was Rs. 12 crores. They knew that this decision has to be taken very carefully, as it involves a huge cost and that the decision, once taken is irreversible.

1. Identify and state the financial decision discussed in the above para.
2. Explain any two factors affecting the decision identified in (i) above.

Answer 1

(i) The financial decision discussed in the passage is the investment decision (Capital Budgeting Decision).

(ii) Two factors affecting the investment decision:

1. Cash flows from the project: The business must evaluate the predicted future cash flows from this investment. The project must generate enough cash flow to fund the project's operation. To make an informed investment selection, it's important to assess the project's cash flow.
2. Rate of return: The company should determine the expected rate of return on investment (ROI). If the return on investment higher than the cost of capital, the decision to invest in modern machinery will be deemed beneficial. To make an informed decision, the corporation should weigh predicted profits against other investment options.