Question

Manoj is a renowned businessman involved in export business of leather goods. As a responsible citizen, he chooses to use jute bags for packaging instead of plastic bags. Moreover, on the advice of his friends, he decides to use jute for manufacturing aesthetic handicrafts, keeping in view the growing demand for natural goods. In order to implement his plan, after conducting a feasibility study, he decides to set up a separate manufacturing unit for producing varied jute products.

In context of the above case:

1. Identify the type of investment decision taken by Manoj for deciding to set up a separate manufacturing unit for producing jute products.

2. State any two factors that he is likely to consider while taking this decision.

Answer 1

1. Capital budgeting decision has been taken by Manoj.

2. The factors affecting Capital Budgeting Decision are as follows:

1. Cash inflows  2. Rate of return

1. Cash inflows : Cash inflows refer to the expected returns or revenue generated by the investment project over its useful life. These inflows typically come from sales revenue, cost savings, or any other income generated directly by the project.

In capital budgeting decisions, it's crucial to accurately estimate the future cash inflows associated with the investment project. These estimates often involve forecasting future sales volumes, pricing strategies, and market conditions.

2. Rate of return: The rate of return, often expressed as a percentage, measures the profitability of an investment project relative to its costs. It represents the relationship between the earnings generated by the project and the capital invested.

There are several methods for calculating the rate of return, including the payback period, net present value (NPV), internal rate of return (IRR), and profitability index.

The rate of return provides insights into the attractiveness of the investment opportunity. Higher rates of return indicate greater profitability and potential for value creation.