Financial Decision
Sunrises Ltd. dealing in ready-made garments, is planning to expand its business operations in order to cater to the international market. To prepare for the future operations, the financial manager estimates that the raw materials will get costlier in the next year and the market will grow in the next 18 months. As the new orders will be placed by the international buyers, the earnings of the company will become more stable. He also suggested that it is advisable to increase production by investing in new machinery. For this purpose the company needs an additional rupees 80,00,000 to replace machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was rupees 8,00,000 and total capital investment was rupees 1,00,00,000.
For increase in production which type of decision is suggested/advised.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Increase in Fixed Capital Requirement
Option (1) Increase in Fixed Capital Requirement — Correct. The financial manager advises the company to increase production by investing in new machinery of higher capacity. Fixed capital is the money invested in long-term assets such as land, buildings and machinery. Buying new machinery therefore raises the fixed capital requirement.
Option (2) Decrease in Working Capital Requirement — Incorrect. Higher production needs more raw material and more stock, and the raw materials are expected to get costlier. None of this lowers the working capital needed.
Option (3) Dividend Decision — Incorrect. The dividend decision is about how much of the profit is paid to shareholders and how much is kept in the business. The passage says nothing about sharing profit.
Option (4) Increase in Working Capital Requirement — Incorrect. The estimate about costlier raw materials does point to more working capital in future. But the step the financial manager advises for increasing production is buying machinery, a long-term investment, which is fixed capital.
Note: The passage is built on an NCERT exercise question on Sunrises Ltd. in the chapter ‘Financial Management’, which has been reproduced by NTA in the exam. One short exercise at the end of the chapter became five questions here, so work through the exercises too.
NCERT (2026-27 Edition): “Factors affecting the Requirement of Fixed Capital … 5. Growth Prospects: 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.”
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