Macro Systems, Inc. is evaluating the replacement of an existing machine. Calcul
ID: 2709264 • Letter: M
Question
Macro Systems, Inc. is evaluating the replacement of an existing machine. Calculate how the change in the following accounts would impact new working capital. Would you recommend purchasing the new equipment? Why?
Accounts Receivable
$175,000
Increase
Accounts Payable
$80,000
Increase
Inventories
$20,000
Decrease
Accruals
$35,000
Increase
Cash
$12,500
Increase
Accounts Receivable
$175,000
Increase
Accounts Payable
$80,000
Increase
Inventories
$20,000
Decrease
Accruals
$35,000
Increase
Cash
$12,500
Increase
Explanation / Answer
Impact on the working capital is
Accounts Receivable
$175,000
Increase
Accounts Payable
-$80,000
Increase
Inventories
-$20,000
Decrease
Accruals
+$35,000
Increase
Cash
+$12,500
Increase
Total change in working capital = + $122500
There is increase in working capital requirements, and the company may also have to borrow significant funds inorder to purchase the asset. If the return from investing in the machinery is more than the cost of borrowing then the project should be accepted.
Accounts Receivable
$175,000
Increase
Accounts Payable
-$80,000
Increase
Inventories
-$20,000
Decrease
Accruals
+$35,000
Increase
Cash
+$12,500
Increase
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