Problem:
Samuels Manufacturing is considering the purchase of a new machine to replace one they feel is obsolete. The firm has total current assets of $920,000 and total current liabilities of $640,000. 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 Changes
Accruals +$40,000
Marketable 0
Inventories --$10,000
Account Payable +$90,000
Notes Payable 0
Account receivable + 150,000
Cash + 15,000
Q1. Using the information given, calculate the change, if any, in net working capital that is expected to result from the proposed replacement action.
Q2. Explain why a change in these current accounts would be relevant in determining the initial investment for the proposed capital expenditure.
Q3. Would the change in net working capital enter into any of the other cash flow components that make up the relevant cash flow? Explain.