Page 4 - Lesson Note 5

which use assets which are prone to obsolescence require higher fixed

capital to purchase such assets.

5. Growth Prospects: Higher growth of an organization generally

requires higher investment in fixed assets. Even when such growth is

expected, a company may choose to create higher capacity in order to

meet the anticipated higher demand quicker. This entails larger

investment in fixed assets and consequently larger fixed capital.

6. Diversification: A firm may choose to diversify its operations for
various reasons, with diversification, fixed capital requirements

increase e.g., a textile company is diversifying and starting a cement

manufacturing plant. Obviously, its investment in fixed capital will

increase.

7. Financing Alternatives: A developed financial market may provide

leasing facilities as an alternative to outright purchase. When an asset is
taken on lease, the firm pays lease rentals and uses it. By doing so, it

avoids huge sums required to purchase it. Availability of leasing

facilities, thus, may reduce the funds required to be invested in fixed

assets, thereby reducing the fixed capital requirements. Such a strategy

is especially suitable in high risk lines of business.

8. Level of Collaboration: At times, certain business organizations share

each other’s facilities. For example, a bank may use another’s ATM or
some of them may jointly establish a particular facility. This is feasible if

the scale of operations of each one of them is not sufficient to make full

use of the facility. Such collaboration reduces the level of investment in

fixed assets for each one of the participating organizations.