Question

Explain the following factors affecting the requirement of fixed capital of a company:
(i) Choice of Technique
(ii) Financing Alternatives
(iii) Growth Prospects

Hint:

Fixed capital requirements depend on business models, financing options, and future growth expectations, influencing long-term investment decisions.

Answer 1

Factors Affecting the Requirement of Fixed Capital:
(i) Choice of Technique
- A capital-intensive organization requires a higher investment in plant and machinery, as it depends more on automation and less on manual labor.
- On the other hand, labor-intensive organizations require a lower investment in fixed assets, thereby reducing their fixed capital requirement.
(ii) Financing Alternatives
- Companies can lease assets instead of purchasing them, reducing the funds required for fixed asset investment.
- The availability of leasing facilities helps reduce fixed capital requirements, as firms pay lease rentals instead of making large capital expenditures.
(iii) Growth Prospects
- Organizations expecting high growth require higher investment in fixed assets.
- To meet anticipated higher demand, companies may expand capacity, necessitating larger investments in fixed assets and increasing fixed capital requirements.