Which of the following statements is NOT true with regard to the use of fixed capital?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → It mainly affects the day-to-day working of the business
Option (1) It influences the overall business risk of the firm — True. Huge sums are invested, and the returns of the whole firm depend on them for years.
Option (2) A large amount of funds is involved — True. A big share of capital funds is blocked in long-term projects.
Option (3) It mainly affects the day-to-day working of the business — False. Fixed capital goes into long-term assets that last more than a year. Day-to-day operations run on working capital, the investment in current assets.
Option (4) The investment decisions are irreversible — True. Once taken, they cannot be reversed without heavy losses.
NCERT (2026-27 Edition): “Management of Fixed Capital … (i) Long-term growth: These decisions have bearing on the long-term growth. The funds invested in long-term assets are likely to yield returns in the future. These will affect the future prospects of the business.” “(ii) Large amount of funds involved: These decisions result in a substantial portion of capital funds being blocked in long-term projects. Therefore, these investments are planned after a detailed analysis is undertaken. This may involve decisions like where to procure funds from and at what rate of interest.” “(iii) Risk involved: Fixed capital involves investment of huge amounts. It affects the returns of the firm as a whole in the long-term. Therefore, investment decisions involving fixed capital influence the overall business risk complexion of the firm.” “(iv) Irreversible decisions: These decisions once taken, are not reversible without incurring heavy losses. Abandoning a project after heavy investment is made is quite costly in terms of waste of funds. Therefore, these decisions should be taken only after carefully evaluating each detail or else the adverse financial consequences may be very heavy.” “Working Capital Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets. …” |