Q.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. Amit and Bijoy plan to import advanced-technology machines costing Rs. 12 crores each to expand their business — a large, long-term commitment of funds described as a "huge cost" and "irreversible". Deciding how much to invest in such long-term assets is the investment decision (capital budgeting decision): it determines where and how much of the firm's funds are committed to fixed assets to earn returns in the future.
2. Two factors affecting the investment (capital budgeting) decision are:

• Cash flows of the project: Before committing Rs. 12 crores, the firm must estimate the series of cash inflows (extra revenue and savings from consistent quality across branches) and cash outflows the machines will generate over their life; the decision is justified only if the expected inflows adequately exceed the outflows. …

1. Identifying the financial decision

The paragraph clearly states that Amit and Bijoy are planning to import expensive machines (Rs. 12 crores each) to expand their business. This involves committing a large sum of money today in the hope of generating future profits. The decision is described as "huge cost" and "irreversible" — these are classic features of a capital budgeting decision (also called an investment decision or long-term asset acquisition decision).

Answer for (i): The financial decision discussed is the Investment Decision (specifically, Capital Budgeting Decision). It refers to the decision about how much and where to invest the firm's funds in long-term assets (here, the machines) to earn the highest possible return.

2. Factors affecting the capital budgeting decision

Two important factors that influence this decision are:

Factor 1: Rate of Return

The core question in any investment decision is: Will the project earn more than what it costs? The rate of return expected from the machine must be compared with the cost of capital (the minimum return the firm must earn to satisfy its investors).

• If the expected return from the machine (say, 18% per year) is higher than the cost of capital (say, 12%), the project adds value and should be accepted.
• If the return is lower, the project destroys value and should be rejected.

In the paragraph, Amit and Bijoy are carefully evaluating this because the decision is irreversible — they cannot easily sell the machine if it fails to generate enough profit.

Factor 2: Cash Flows of the Project …