Question

Explain the following factors affecting the requirements of fixed capital:

Hint:

The scale of operations determines the need for fixed capital, while financing alternatives like leasing can reduce upfront capital investment.

Answer 1

(i) Scale of operations:
A larger organisation operating at a higher scale needs bigger plants, more space, etc., and therefore requires higher investment in fixed assets when compared with a small organisation.
(ii) Financing alternatives:
The availability of leasing facilities may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. When an asset is taken on lease, the firm pays lease rentals and uses it, avoiding the huge sum required for purchasing it.