Question

Sree Lakshmi Ltd. is a newly promoted company. While taking the investment decision, the financial manager of the company allotted the investment outlay of Rs. 25 crore in Land & Buildings, Furniture, and copyrights.

1. Identify the type of capital referred to this context.

2. Explain the factors influencing the investment in these assets.

Answer 1

1. Fixed Capital:

Fixed capital refers to the capital needed for the the acquisition of fixed assets to be used for a longer period.

2. Factors affecting Fixed Capital

1. Nature of Business:

A trading concern needs lower investment in fixed assets compared with a manufacturing organization. 

2. Scale of Operations: 

An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale.

3. Choice of Technique: 

A capital-intensive organisation requires more amount of fixed capital than labour intensive organisations.

4. Technology Upgradation:

Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations.

5. Growth Prospects:

Higher growth of an organisation generally requires higher investment in fixed assets. 

6. Diversification: 

The firms dealing in number of products (Diversication) requires more investment in fixed capital.

7. Use of Fixed Assets:

Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.