Identify the incorrect statement, from the options given below.

Instead of buying the fixed asset, its leasing would increase the fixed capital requirement.

The correct answer is option 2- Instead of buying the fixed asset, its leasing would increase the fixed capital requirement.

1. Collaboration of firms reduces the level of fixed investment. IT IS CORRECT. At times, certain business organisations share each other’s facilities. For example, a bank may use another’s ATM or some of them may jointly establish a particular facility. This is feasible if the scale of operations of each one of them is not sufficient to make full use of the facility. Such collaboration reduces the level of investment in fixed assets for each one of the participating organisations.

2. Instead of buying the fixed asset, its leasing would increase the fixed capital requirement. IT IS INCORRECT.  A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business.

3. Technology upgradation requires more fixed capital. IT IS CORRECT. In certain industries, assets become obsolete sooner. Consequently, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases. For example, computers become obsolete faster and are replaced much sooner than say, furniture. Thus, such organisations which use assets which are prone to obsolescence require higher fixed capital to purchase such assets.

4. Higher growth of firm required higher fixed investment. IT IS CORRECT.  Higher growth of an organisation generally requires higher investment in fixed assets. Even when such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails larger investment in fixed assets and consequently larger fixed capital.