A Fixed asset is termed as a long term asset that a firm owns and it is utilized by the firm in its daily production activities. It is not easy to convert fixed assets into cash in a short time and the conversion may take at least one year. There are many examples of fixed assets that include buildings, machinery, furniture and cars among others and they are collectively known referred to as plant. It is important for a firm to make good decisions when acquiring newly fixed assets because they are the assets used for production of goods, therefore, can be significant in the growth of the firm.
Long term budgeting decisions are the decisions made by a firm to plan on how to fund or use its funds over a long time mostly exceeding one year to fund its projects or purchase of assets. Long term finance usually last for more than a year and it is usually meant to purchase assets of the business. Assets such as building and machinery are purchased using this finance. Success of a firm can be credited to how funds is managed to buy the fixed asset that is needed in that firm. Therefore, a firm should manage its funds because it has an effect on the liquidity of the firm.
In the production, fixed assets are the most important component because they are the reason the firm is operating. A firm with quality long term assets is bound to be a going concern for the foreseeable future because there are fewer breakdowns of the machinery. Therefore, it enables a company to continue with its production resulting in the growth of the company as well as profitability. Just like long term budgeting decisions which enable the firm to finance its projects in a long time, therefore, deal with liquidity problems. Fixed assets give a firm the ability to operate in a long time, therefore, allowing the firm to continue producing goods and services that generate profits for the company as well as enabling it to grow.
It is critical for a firm to evaluate an investment in fixed assets by the firm because it assists the firm to make a decision as to whether buy the asset or not. An organization that is dependent on the fixed assets may need to use the different methods of assessing viability of a fixed asset that the company wants to buy. The sole reason for assessing the viability of the asset is to know whether the company may make profit or loss when the fixed asset is bought and how it may affect the cash flows of the firm over a set time.
In addition, capital budgeting decision which is also known as investment decision takes into account several elements or variants that the investment contains. The total cost of an investment may include the cost of installation, there shall be an increase in the quantity of raw materials required in the production but the main goal of the firm is to increase future earnings. Hence it is essential for a firm to conduct an appraisal for investment in fixed assets to judge whether the company may be profitable in the future or if it may result in a loss. Purchase of a fixed asset may increase productivity, reduce overall expenses by the firm and increase the real value of the company; therefore, it is critical to evaluate investments in fixed assets.
References
Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. London: Wiley.
Peterson, R. H. (2002). Accounting for Fixed Assets. New York: John Wiley & Sons.
