Correct Answer:
C. Buying a new factory
A capital budgeting decision involves evaluating long-term investment opportunities, typically for assets that will generate returns over many years and are crucial for a firm's growth and future profitability. These decisions commit significant resources and are often irreversible.
- Buying a new factory is the correct answer because it represents a substantial, long-term investment in a fixed asset, aiming to expand production capacity and generate revenue over an extended period. This perfectly aligns with the definition of a capital budgeting decision.
- Deciding credit terms (A) is part of working capital management, specifically managing accounts receivable, which is a short-term operational decision.
- Inventory management (B) also falls under working capital management, focusing on optimizing short-term asset levels for operational efficiency.
- Issuing dividends (D) is a financing decision, specifically related to payout policy, determining how profits are distributed to shareholders rather than an investment in long-term assets.
Understanding the distinction between long-term investment, short-term operational, and financing decisions is fundamental in financial management.