• Skip to primary navigation
  • Skip to main content
  • Skip to footer
WallStreetMojo

Wallstreet Mojo

Wallstreet Mojo

MENUMENU
  • Resources
        • Corporate Finance

          • Equity Capital
          • Debt Capital
          • Corporate Finance Careers
        • Corporate Finance
        • Valuation

          • Discounted Cash Flow
          • Dividend Discount Model
          • Terminal Value
        • Valuation
        • Investment Banking Guides

          • Investment Banking
          • What is LBO?
          • What is Pitch Book?
        • Investment Banking Guides
        • Mergers and Acquisitions

          • What is M&A?
          • Hostile Takeover
          • Golden Parachute
        • Mergers-and-Acquisitions
        • Financial Modeling

          • What is Financial Modeling
          • Financial Modeling Excel
          • Financial Model Types
        • Financial Modeling
        • Others

          • Resources (A to Z)
          • Accounting
          • Financial Statement Analysis
          • Equity Research
          • Private Equity
          • Excel
  • Free Courses
  • All Courses
        • Certification Courses

          Certificate
        • All in One Financial Analyst Bundle

          Financial-Analyst-Bundle
        • Valuation Course

          Valuation-Course
        • Financial Modeling Course

          Financial-Modeling-Course
        • Others

          • Equity Research Course
          • M&A Course
          • Investment Banking Course


          • Private Equity Course
          • Venture Capital Course
          • View All
  • 250+ Courses All in One Bundle
  • Login

Fixed Capital

Home » Corporate Finance » Equity Capital » Fixed Capital

By Roshan Waingankar Leave a Comment

Fixed Capital

What is Fixed Capital?

Fixed capital refers to the investment made by the business for acquiring long term assets. These long term assets don’t directly produce anything, but help the company with long-term benefits.

A fixed capital example would be that if a firm invests into a building where the production process will take place, it would be referred to as fixed capital. Because –

  • Firstly, the building will not get directly consumed by the production process. But if the company doesn’t have the building, it wouldn’t be able to run the production process.
  • Secondly, investing into the building is a fixed capital because this building will serve the business for a long period of time and the building can be referred to as long term asset.
  • Thirdly, if the business thinks to sell out the building in future, it will get a residual value even if its economic usefulness is exhausted.

Fixed Capital Examples

Below is an excerpt from Colgate SEC Filings. Here we can find may fixed capital examples

Fixed Capital

  • Land
  • Building
  • Manufacturing machinery and equipment
  • Other equipments.

Also, please note that Intangible assets like Patents and Copyrights are also classified as examples of fixed capital investments.

Recommended Courses

  • Financial Analyst Training
  • Certification Training in Investment Banking
  • Online Certification Course in Mergers and Acquisitions

Why is fixed capital important to any business?

There are multiple reasons for which fixed capital in a business. Let’s take a simple example to illustrate this.

Popular Course in this category
Cyber Monday Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
4.9 (1,067 ratings)
Course Price

View Course

Related Courses
Financial Modeling CourseEquity Research CourseM&A Course

Let’s say that Peter wants to start a bookselling business. He has lots of old books lying around in his house. He knows that they are valuable and most of them are out of print. So he can charge a premium to sell those books.

The challenge is where does he start his business? He doesn’t have any place to open a shop. So, he talks to his old friend Sam and tells him that he wants to buy a shop in the town. But now the issue is he needs furniture to stack up books and arrange them in order so that the shop looks nice.

He asks a local carpenter to build a structure within which he can adorn his books. Within 15 days, everything is done and Peter starts his business. Now the question is if Peter would’ve not invested in a shop or in the furniture, could he start his business?

The answer is “no”. Here the “shop” and the “furniture” are Peter’s fixed capital without which he couldn’t start his business.

 

Sources of Fixed Capital

There are many sources of fixed capital. Let’s have a look at them one by one –

  • Owner’s own resources: This is the first and foremost source of fixed capital. Since at the start of business, fixed capital is must have, the owner sources it from his own resources.
  • Term loans from bank/financial institution: If the owner doesn’t have enough money to invest into fixed capital; s/he would take help from the bank or any financial institution and take a loan either against the mortgage or against no mortgage. If the loan amount is bigger, the owner has to arrange a mortgage to take the loan; if the loan amount is smaller, the owner doesn’t need to arrange any mortgage to avail the loan.
  • The issue of shares: If a company feels that it has to issue shares to finance the dire need of buying/acquiring long assets, we will call it the fixed capital. A private company can become public by conducting IPO or a public company can issue new shares to finance the need of fixed capital into the business.
  • Retained earnings: When a company needs to invest in fixed capital, it can use internal finance also. Retained earnings are a portion of profit which is retained and reinvested into the company. Usually, retained earnings are invested in acquiring new fixed capital.
  • The issue of debentures: By issuing of debentures, companies source funding for acquiring long-term assets. Companies issue bonds. People who are interested in investing in a company buy those bonds and pay the money for those. And the companies then use that money to invest into acquiring long-term / non-current assets.

How does a business know which long-term assets to invest into?

As you can see, fixed capital is important for running a business. But how does a business know which long-term assets to invest into?

It should be done by comparing the value of a particular long-term asset with how much cash flow it would be able to generate in the long term. For example, let’s say that a business has purchased a machine. And it has been found out that the machine would serve the business for next 10 years. And using this particular machine would improve the production process and also improve the productivity of the workers; as a result, the business knows investing into a machine is a good idea.

There are three techniques that are being used by the businesses to find out whether the potential cash inflows would outweigh the cash outflows.

  • Net Present Value (NPV): Using this technique helps a business see its present value of future cash inflow and can easily compare whether it is a good idea to invest in the asset.
  • Internal Rate of Return (IRR): IRR helps find out the right rate of return with a lot of trial and effort. If the IRR seems good, it’s wiser to invest in a long-term asset.
  • Payback Period (PP): If you invest in an asset, within how much time it would return the cash outflow. For example, if a business has to decide between investing into “building A” and “building B” and if the payback period of A and B are 5 and 10 respectively, the business should choose to invest into A (depending on the amount invested is similar).

Recommended Article

This is a guide to what is Fixed Capital and why it is important for any business. Here we also discuss various sources of fixed capital along with the three techniques (NPV, IRR, and Payback) to evaluate fixed capital investments. You may also have a look at the following articles to learn more about Corporate Finance –

  • Intangible Assets Examples
  • Residual Value Example
  • What are Non-Current Assets?
  • Examples of Tangible Assets
  • How to analyze Current Assets?
  • Present Value Factor Formula Examples
  • Net Present Value Formula
  • Rule of 72 Formula
  • Time Value of Money Formula
0 Shares
Share
Tweet
Share

Filed Under: Corporate Finance, Equity Capital

Reader Interactions
Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Footer
COMPANY
About
Reviews
Blog
Contact
Privacy
Terms of Service
FREE COURSES
Free Finance Online Course
Free Accounting Online Course
Free Online Excel Course
Free VBA Course
Free Investment Banking Course
Free Financial Modeling Course
Free Ratio Analysis Course

CERTIFICATION COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Business Valuation Course
Equity Research Course
CFA Level 1 Course
CFA Level 2 Course
Venture Capital Course
Microsoft Excel Course
VBA Macros Course
Accounting Course
Advanced Excel Course
Fixed Income Course
RESOURCES
Investment Banking
Financial Modeling
Equity Research
Private Equity
Excel
Books
Certifications
Accounting
Asset Management
Risk Management

Copyright © 2019. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

CYBER WEEK OFFER - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More