Change in net working capital calculationSamuels Manufacturing is considering th
ID: 2585028 • Letter: C
Question
Change in net working capital calculationSamuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of
$921,000
and total current liabilities of
$643,000.
As a result of the proposed replacement, the following changes are anticipated in the levels of the current asset and current liability accounts noted.
Account
Change
Accruals
+$45,000
Marketable securities
0
Inventories
13,000
Accounts payable
+93,000
Notes payable
0
Accounts receivable
+151,000
Cash
+18,000
a. Using the information given, calculate any change in net working capital that is expected to result from the proposed replacement action.
b. Explain why a change in these current accounts would be relevant in determining the initial investment for the proposed capital expenditure.
c. Would the change in net working capital enter into any of the other cash flow components that make up the relevant cash flows? Explain.
Account
Change
Accruals
+$45,000
Marketable securities
0
Inventories
13,000
Accounts payable
+93,000
Notes payable
0
Accounts receivable
+151,000
Cash
+18,000
Explanation / Answer
( a )
Working Capital before replacement = Current Asset-Current Liability
= 921000-643000
= $278000
Working Capital = $278000
Add: Increase in Accounts Receivable $151000
Add: Increase in Cash. $18000
Less: Decrease in Inventory. ($13000)
Less: Increase in Accounts payable. ($93000)
New Working Capital $341000
Therefore, By this replacement working capital is increased by (341000-278000) $63000
( b )
The change in the current account cause a result in change in working capital, The decision of capital expenditure is highly affected by the working capital. In this case, the working capital is increased by replacement of assets so he should replace the asset.
( c )
The change in the working capital enter into certain cash flow components that are:
1. Increase in the account receivable result in increase cash inflow in the near future.
2. Increase in the account payable result in the increase cash outflow in the near future.
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