Q.'KJ Ltd.' is a tile manufacturing company in Udaipur having its own stores in various cities of Rajasthan. Instead of having its own trucks, the company decides to use trucks on lease to transport its tiles to various stores. Identify how the company's decision to lease trucks will affect its capital requirements. (A) Decrease the fixed capital requirements (B) Increase the fixed capital requirements (C) Will not affect the fixed capital requirements (D) Decrease the working capital requirements
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Start your 14-day free trial to unlock the full solution →Leasing trucks instead of buying them reduces the company’s need for long-term funds tied up in fixed assets, so it decreases fixed capital requirements.
When a business like KJ Ltd. decides to lease trucks rather than purchase them outright, the immediate effect is on its fixed capital — the money invested in long-term assets such as land, buildings, machinery, and vehicles. Fixed capital is the foundation of production capacity; it stays with the company for years and is not easily converted into cash. Buying a fleet of trucks would require a large, one-time outflow of funds, locking up capital that could otherwise be used for day-to-day operations or expansion.
By choosing to lease, KJ Ltd. avoids that heavy upfront investment. The leasing company owns the trucks; KJ Ltd. simply pays a periodic rental fee for their use. This means the company does not have to raise or set aside a big sum for purchasing vehicles. The fixed capital requirement — the total long-term investment in assets — therefore goes down. The company can still transport its tiles to stores across Rajasthan, but without the burden of owning depreciating assets.
Leasing is a form of operating lease in accounting terms. It is treated as a rental expense, not as an asset purchase, so it does not appear on the balance sheet as fixed capital.
Now, what about working capital? Working capital is the money needed for short-term operations — raw materials, salaries, rent, and so on. Leasing trucks does not directly change the volume of tiles produced or sold, nor does it alter the cash cycle of buying raw materials and collecting payments from stores. So the decision to lease does not affect working capital requirements. The correct answer is therefore about fixed capital, not working capital.
A common mistake is to think that leasing reduces working capital because it saves cash. But saving cash by avoiding a big purchase does not change the requirement for working capital — it only frees up cash that can be used elsewhere. The requirement itself depends on production and sales volume, not on how you finance your fixed assets.
Let’s look at the options one by one: …
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