Change in net working capital calculation Samuels Manufacturing is considering t

Question

Change in net working capital calculation Samuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of $916,000 and total current liabilities of $642,000. 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 Marketable securities Inventories Accounts payable Notes payable Accounts receivable Cash +$43,000 17,000 +95,000 +154,000 +12,000

Explanation / Answer

(a) change in net working capital = (current assets - current liabilities) of current year - (current assets - current liabilities) of last year = changes in current assets - changes in current liabilities

so change in net working capital = (154000 + 12000 - 17000) - (43000 + 95000) = 11000

so the change in net working capital is 11000 from the proposed replacement action

(b) As the amount of working capital is needed in the beginning of the project, and without which project can not start, so it is essential to take it into account while determining proposed capital expenditure

(c) Yes, in computing the terminal cashflow, the net working capital increase should be reversed.

The amount of additional working capital will be released when project will come to an end, so it will be added in last year operating cash flow

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