Question

Name the factor due to which a petro chemical company requires much higher investment in fixed capital than an information technology company. However both may generate same amount of revenue.

Explain any two factors affecting fixed capital requirement?

Answer 1

Factor due to which a petrochemical company requires much higher investment in fixed capital than an information technology company are-

1. Nature of Business:

The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as a trading company does not need the plant, machinery, etc. Hence petrochemical company requires fixed capital in huge as compared to information technology.

2. Scale of Operation:

The companies which are operating at large scale require more fixed capital as they need more types of machinery and other assets whereas information technology company will not operate at that level where the manufacturing company operates.

Following are some factors affecting fixed capital requirement-

(a) Growth Prospects:

Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital.

(b) Diversification:

Companies which have plans to diversify their activities by including more range of products require more fixed capital as to produce more products they require more plants and types of machinery which means more fixed capital.

(c) Availability of Finance and Leasing Facility:

If companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets on easy installments instead of paying a huge amount at one time. On the other hand, if easy loan and leasing facilities are not available then more fixed capital is needed as companies will have to buy plant and machinery by paying huge amount together.