Question

State how the following factors affect the requirements of fixed capital of a company :

(i) Choice of technique

(ii) Growth prospects

(iii) Financing alternatives

Hint:

For each factor, say whether the fixed capital need goes up or down and why.

Answer 1

Step 1: Understand the question:
The question asks how three factors change the fixed capital need of a company.
We state the effect of each one.

Step 2: (i) Choice of technique:
A firm can run in a labour intensive way or a capital intensive way.
A capital intensive firm uses more machines, so it needs more fixed capital.
A labour intensive firm uses more workers and needs less fixed capital.

Step 3: (ii) Growth prospects:
A firm that expects to grow fast must build more capacity in advance.
So it invests more in fixed assets and needs more fixed capital.
A firm with weak growth prospects needs less.

Step 4: (iii) Financing alternatives:
If the firm can lease assets instead of buying them, it does not pay the full cost at the start.
So the need for fixed capital falls.
If leasing is not available, the firm must buy and the need is higher.

Final Answer:
Capital intensive technique and high growth raise the fixed capital need, and leasing lowers it.