For the following two statements of Assertion (A) and Reasoning (R) select the correct code:

Assertion (A): Risk analysis of capital investment is the most complex and controversial area in finance.

Reasoning (R): Capital investment decisions are based on estimates of future cash inflows.

Code:

The correct answer is (A) and (R) both are correct and (R) is the right explanation of (A).

Key Points

• Capital investment analysis is a budgeting tool that companies and governments use to forecast the return on a long-term investment.
• Capital investment analysis assesses long-term investments, including fixed assets such as equipment, machinery, or real estate.
• Capital investment analysis is used to identify the option that can yield the highest return on invested capital.

Additional Information 

• Capital investments are risky because they involve significant, up-front expenditures on assets intended for many years of service, and they will take a long time to pay for themselves.
• Risk analysis of capital investment is the most complex and controversial area in finance.
• Thus, Assertion(A) is correct. 
• Future cash flow estimates are important determinants of capital investment decisions.
• Thus, Reason(R) is also correct. 
• Adjustment of risk is necessary to help make the decision as to whether the returns out of the project are proportionate with the risks borne and whether it is worth investing in the project over the other investment options available.
• Risk adjustment is required to know the real value of the Cash inflows.
• Thus, R is the correct explanation of A. 

Hence, the correct answer is (A) and (R) both are correct and (R) is the right explanation of (A).