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capital calculation Samuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete.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 $919,000 and total current liabilities of $645,000. As a result of the proposed replacement, the following changes are anticipated in the levels of the current asset and current liability accounts noted.

Answer 1

Change in Working Capital = Change in Assets - Change in Liabilities

= (Inventories + Accounts Receivables + Cash ) - (Accruals + Accounts Payable )

= (-13000 + 15000 + 10000) - (44000 + 89000) = 14000

Increase or decrease of currents accounts means either capital is getting free or more capital is required to operate the business. Buying a new machine is initial investment but along with the new machine other requirement also changes like if new machine is with higher production capacity we will need to store more raw material so there is change in inventory, we will buy more raw material so there is change in accounts payable, now we have more finished goods due to higher capacity so we have more inventory. now we are supplying more so there is change in accounts receivable. So to identify the opportunity gain, to cope up with such changes we need to identify and manage corking capital accordingly in case of new project.

Change in working capital is part of operating cash flow and we have further components like cash flow from investing and financing activities. Adding all gives us Total Cash Flow to the firm.