Change in net working capital calculation Samuels Manufacturing is considering t
ID: 2781657 • 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capital calculationSamuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete.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 $918,000 and total current liabilities of $649,000. 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
+$41,000
Marketable securities
0
Inventories
11,000
Accounts payable
+86,000
Notes payable
0
Accounts receivable
+155,000
Cash
+15,000
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.
Round all answers to the nearest dollar.
Account
Change
Accruals
+$41,000
Marketable securities
0
Inventories
11,000
Accounts payable
+86,000
Notes payable
0
Accounts receivable
+155,000
Cash
+15,000
Explanation / Answer
Net Working Capital chnage=Increase in current assets(excluding cash)-Increase in current liabilities=155000-11000-86000-41000=17000
+ sign would show investment and - sign would show inflow of cash
A project adds to current assets- additional inventories/ potential increases in accounts receivables arising from new sales. Increases to current assets, are generally offset by current liabilities for financinge new project. But if net working capital change is +, change to current assets is more than change in current liabilities. Increase in current assets means investment would be needed to purchase those assets and thus cash outflow and increase in liabilities would mean paying late thus an inflow.
No as it is already included as Working capital investment it need not enter in any of the other cash flow components
As current
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