Which of the following is an example of fixed capital expenditure for which a business needs finance?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Purchase of building
Option (1) Payment for raw materials — Incorrect. Payment for raw materials is a working capital requirement. It is a day-to-day cost of running the business.
Option (2) Salaries to employees — Incorrect. Salaries are paid every month, so they are also a working capital requirement.
Option (3) Payment of brokerage on an issue of shares — Incorrect. Brokerage is a floatation cost, a cost of raising funds through an issue. It does not buy a long-lasting asset, so it is not fixed capital expenditure.
Option (4) Purchase of building — Correct. Fixed capital is spent on long-lasting assets such as machinery and buildings. A building is bought once and used for many years, so it is fixed capital expenditure.
NCERT (Pre-rationalised Edition): “INTRODUCTION You all know that a business needs finance from the time an entrepreneur makes the decision to start it. It needs finance both for working capital requirements such as payments for raw materials and salaries to its employees, and fixed capital expenditure such as the purchase of machinery or building or to expand its production capacity. … Business can raise these funds from various sources and in different ways through financial markets. …” “2. Commercial Paper: … Example: Suppose a company needs long-term finance to buy some machinery. In order to raise the long term funds in the capital market the company will have to incur floatation costs (costs associated with floating of an issue are brokerage, commission, printing of applications and advertising etc.). Funds raised through commercial paper are used to meet the floatation costs. This is known as Bridge Financing.” |