What is meant by Capital Budgeting? State any four factors affecting fixed capital requirement of a firm.
Answers
Capital budgeting is important because it creates accountability and measurability. The capital budgeting process is a measurable way for businesses to determine the long-term economic and financial profitability of any investment project
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Answer:
Fixed capital involves allocation of firm’s capital to long term assets or projects. Managing fixed capital is related to investment decision and it is also called Capital Budgeting. The capital budgeting decision affects the growth and profitability of the company.
Explanation:
The four factors affecting fixed capital requirements of a firm 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 trading company does not need plant, machinery, etc.
2. Scale of Operation:
The companies which are operating at large scale require more fixed capital as they need more machineries and other assets whereas small scale enterprises need less amount of fixed capital.
3. Technique of Production:
Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery.
4. Technology Up-gradation:
Industries in which technology up-gradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery whereas companies where technological up-gradation is slow they require less fixed capital as they can manage with old machines.
Hope this helps you