What financial challenge is ABC currently facing?

• A. Consistently high profits with no liquidity issues
• B. Negative net cash flow in the short term due to high capital expenditure
• C. Excess cash due to underutilized capacity
• D. Stable cash flow with modest investments

Answer: (B)

This question tests how capital expenditure affects a company's cash position in the short term, even when profits look strong. When ABC spends heavily on capital assets, cash leaves the business upfront. If the cash generated from day-to-day operations isn’t enough to cover those large outflows, net cash flow for the period becomes negative. That cash squeeze is a liquidity challenge, even if profits are being earned.

So the best fit is the scenario that describes a short-term negative net cash flow caused by high capital expenditure. It captures the reality that expansion and asset investments can drain cash now while future benefits may come later. The other scenarios describe healthy liquidity, excess cash, or stable cash flow with modest investments, which don’t reflect a current liquidity problem.