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What is meant by 'Long-term Investment Decision? State any three factors which affect the long-term
investment decision.

A long-term investment decision is otherwise called as Capital Budgeting decision. It involves investment
for a long period of time. Capital budgeting decisions are very important as it involves huge investment of
fund for a long period of time and are irreversible in nature.

Factors which affect capital budgeting decisions are:

(a) Cash flows of the project: When a company takes an investment decision involving huge amount it
expects to generate some cash flows over a period. These cash flows are in the form of a series of cash
receipts and payments over the life of an investment. The amount of these cash flows should be carefully
analysed before considering a capital budgeting decision. If the cash inflow exceeds cash outflow,
a project can be selected otherwise rejected. Time value of cash should also be taken into account for
better decision making.
(b) The rate of return: The most important criterion is the rate of return of the project. The expected rate of
return from each project must be considered and compared. The project that will give the maximum rate
of return must be selected.
(c) The investment criteria involved: The decision to invest in a particular project involves a number of
calculations regarding the amount of investment, interest rate, cash flows and rate of return. There are
different techniques to evaluate investment proposals which are known as capital budgeting techniques.
These techniques are applied to each proposal before selecting a particular project.

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