Salalah Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of US$920,000 and total current liabilities of US$640,000. As a result of the proposed replacement, the following changes are anticipated in the levels of the current asset and current liability accounts noted.
Account Change
Accruals......................................+US$ 40,000
Marketable securities......................................0
Inventories.........................................- 10,000
Accounts payable.................................+ 90,000
Notes payable..............................................0
Accounts receivable............................+ 150,000
Cash................................................+15,000
a. Using the information given, calculate any change in net working capital that is expected to result from the proposed replacement action.
b. Explain why a change in these current accounts would be relevant in determining the initial investment for the proposed capital expenditure.
c. Would the change in net working capital enter into any of the other cash flow components that make up the relevant cash flows? Explain.