CAPITAL BUDGETING DECISION ON THE BASIS OF DECISION SITUATION

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Capital budgeting decision on the basis of various types of decision can be categorized as under :

  • Mutually exclusive decision : The business decision are said to be mutually exclusive if two or more  alternative proposals are such that the acceptance of one proposal will exclude the acceptance of the other alternative decision. A firm may consider the option of semi -automatic or highly automatic machine. If the firm installs semi -automatic machine , it excludes the acceptance of proposal to install highly automatic machine.
  • Accept and reject decision : This decision occurs when proposals are independent and don’t compete with each other. The firm may accept or reject a proposal based on the maximum return on capital employed.
  • Contingent decisions : These are dependable proposals. The investment in one proposal needs investment in one or more proposal. If a company accepts to make a factory in a hilly area then the business has to invest in roads, infrastructure and related areas.

These investments need to be decided by the different businesses.  Based on the either of the various decision situations ,the business has to make its business decision.

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