Question

Explain the following factors affecting the requirements of fixed capital of a company :

(i) Technology upgradation

(ii) Financing alternatives

Hint:

Fast-changing technology forces repeated purchase of new assets, so fixed capital rises. Leasing lets a firm avoid buying assets, so fixed capital falls.

Answer 1

Step 1: Meaning of fixed capital:
Fixed capital is the money used to buy long-term assets such as land, buildings and machinery. These assets are not sold in the normal course of business.
Technology upgradation and financing alternatives both change how much a company must invest in such assets.

Step 2: Factor (i): Technology upgradation:
In some industries, machines become outdated fast because new technology keeps coming. These firms must replace or upgrade their plant often.
So they need more fixed capital. A firm in a field where technology changes slowly can use the same machines for many years and needs less.

Step 3: Example for technology upgradation:
A mobile phone maker must change its production line every few years. A brick maker can use the same kiln for decades.
The phone maker therefore needs a larger fixed capital.

Step 4: Factor (ii): Financing alternatives:
A firm can take assets on lease or hire instead of buying them. Then it need not pay the full price upfront.
When such options are available, the need for fixed capital goes down. When they are not, the firm has to buy the assets and needs more fixed capital.

Step 5: Example for financing alternatives:
A transport firm that leases its vehicles needs a smaller sum than one that buys every vehicle outright.
So the availability of leasing and similar options reduces the fixed capital requirement.

Final Answer:
Fast technology upgradation increases fixed capital needs, while the availability of leasing and similar alternatives reduces them.