Categorizing Resources: Fixed, Working or Growth Capital
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To compute the cost of expanding his existing business, Bob makes the following estimates:
Adjacent lot $40,000
Metal prefab building 25,000
Hydraulic lifts 15,000
Tools and equipment 9,000
Parts and inventory 5,000
Additional operating expenses 55,000
TOTAL $149,000
Questions
1. Classify Bob's expansion estimates into the three categories of capital: (a) fixed capital requirements, (b) working capital requirements, and (c) growth capital requirements.
2. Explain to Bob the possible (and realistic) sources of capital for expansion. Where would you recommend that he go for the funds he needs?
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Solution Summary
Given an auto mechanic's purchases, this solution classify the owner's expansion estimates into fixed capital requirements, working capital requirements, and growth capital requirements. It then discusses the possible (and realistic) sources of capital for expansion and suggests the best combination of those sources.
Solution Preview
1. I could not find the term "growth capital investments" in my research. However, I found three categories very close to the ones you listed, so here we go:
Fixed Capital Requirements
These are fixed assets such as land, buildings, equipment, and improvements. Thus, Bob's fixed capital requirements are:
Adjacent lot $40,000
Metal prefab building 25,000
Hydraulic lifts 15,000
Tools and equipment 9,000
Total Fixed Capital Requirements $89,000
Working Capital Requirements
These are current assets and current liabilities such as cash, inventory, prepaid expenses, accounts payable and accrued expenses. Thus, Bob's working capital requirements are parts and inventory for $5,000.
Growth Capital Requirements
These are the additional expenses the company incurs in order to expand. These are non-capital costs such as rent, insurance, maintenance, and other operating expenses. Bob's growth capital requirements are additional operating expenses of $55,000.
2. The cardinal rule of finance is to match the maturity of one's debt with the life of the expenditure for which that debt was ...
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