Of the following, which would not constitute an investment decision by the financial managers of the firm?

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Framing the question, we’re asked to determine which of the listed actions would not be classified as an investment decision by the firm’s financial managers. Investment decisions typically involve acquiring long-term assets or investments that will generate future benefits, rather than actions aimed at financing, restructuring, or divesting.
Option 1: GHI Ltd buys 10 new packaging machines for its factory for $1.2 million. This is a classic capital budgeting decision: acquiring a physical fixed asset that will be used in production over multiple years. It directly affects capacity and productivity and involves capital expenditure and depreciation considerations. Therefore, it is an investment decision.
Option 2: MNO Ltd buys 10 per cent of its outstanding shares for $8 million. If interpreted as acquiring treasury stock (own company shares), this is a financing decision aimed at altering the capital structure or distributing funds to shareholders, not an investment in productive assets or external business opportunities. From a corporate finance perspective, purchasing its own shares is generally categorized as a financing activity, not an investment decision. However, if the phrase were intended to mean acquiring a stake in another company, it would be an investment decision; the wording typically suggests a buyback of the company’s own shares, which tilts toward financing.
Option 3: ABC Ltd buys 20 per cent of the outstanding shares of DEF Ltd for $9 million. This represents acquiring a significant minority stake in another company. Such an investment in an external entity’s equity is a portfolio or strategic investment decision and falls squarely under investment decisions because it uses capital to acquire income-producing or strategic assets.
Option 4: All the options are investment decisions. This statement would be false if any of the listed actions clearly do not constitute an investment decision as defined by the firm’s decision framework. Since at least one item (and potentially two, depending on interpretation of option 2) may not be an investment decision, this option is unlikely to be correct.
Option 5: JKL Ltd sells a retail outlet that it owns for $2.1 million. Selling a long-term asset is a disinvestment or divestment action. It exchanges an asset for cash and is typically classified as a financing or strategic restructuring decision rather than an investment decision aimed at generating future production capacity or returns from new investments.
In summary, options involving the purchase of new productive assets (Option 1) or external equity investments (Option 3) align with investment decisions. Options involving changes to the existing capital structure, treasury activity, or divestment of an asset (Options 2 and 5) are typically not categorized as investment decisions in the standard framework used by financial managers. The exact classification of Option 2 hinges on whether the shares being purchased are the firm’s own (treasury stock, financing) or of another firm (external investment); the conventional reading points toward financing for a buyback. The key distinction is whether the action is about committing capital to acquire/expand productive assets or external investments (investment decisions) versus financing or divestment activities (not investment decisions).

FINC5001 (ND) 1.6: Module 1 Practice Problems

Of the following, which would not constitute an investment decision by the financial managers of the firm?

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