Question

Study the following case/situation and express your opinion.

A company is planning to enhance it's production capacity and is evaluating the possibility of purchasing new machinery whose cost is 2 crore or has alternative of machinery available on lease basis.

1. What type of asset is machinery?
2. Capital used for purchase of machinery is fixed capital or working capital?
3. Does the size of a business determine the fixed capital requirement?

Answer 1

1. Machinery is fixed asset since it is used in business for longer time period.
2. The capital used for purchase of machinery is fixed capital.
3. Yes, size of a business determines the fixed capital requirement. When business operations are carried out on a large scale, it will have higher fixed capital requirement as most of the production processes are based on automatic machines and equipment.