Question

Mr. Ankit is a newly appointed Finance Manager of Neo Ltd., a manufacturing and trading enterprise. His first assignment with the new employer is about allocation of its capital among projects/assests with long term implications. Explain the various factors he needs to consider in this regard.

Answer 1

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 (Diversification) 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.