d- P11-10 Change in net working capital calculation MSF Manufacturing Company is
ID: 2788503 • Letter: D
Question
d- P11-10 Change in net working capital calculation MSF Manufacturing Company is cons com- ring the purchase of a new machine to improve its production efficiency. The pany has total current assets amounting to $865,000 and total current liabilities c 5673,000. As a result of the proposed replacemen expect t, the following changes are ed in the amount of the current assets and current liabilities noted. Change +$ 43,500 -69,000 +378,000 Account Cash Inventories Accounts receivable Accounts payable Notes payable Accruals Marketable securities 0 + 230,000 + 38,000 a. Using the information given, calculate any change in net working capital that is b. Explain why a change in these current accounts would be relevant in determining c. Would the change in net working capital enter into any of the other cash flow expected to result from the suggested replacement plan. the initial investment for the proposed capital expenditure. components that make up the relevant cash flows? Explain.Explanation / Answer
a.
b. The change in working capital forms part of initial cash outflow which will be considered as initial investment.
Capital budgeting decision takes cash outflows and inflows for calculating the worth of the investment. Change in working capital is a kind of initial outflow hence considered as initial investment.
c. Working capital portion that is recouped at a later point of time forms part of relevant cash flows. Generally initial investment in working capital is recouped at the end of the project's life which will be considered as a inflow then.
Particulars Amount Amount Current assets: Cash 43000 Inventories -69000 Accounts receivable 378000 A Increase in current assets 352000 352000 Current liabilities: Notes payable 230000 Accruals 38000 B Increase in current liabilities 268000 268000 A-B Net increase in working capital 84000Related Questions
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