How does the purchase of a new machinery to expand

Solution

Working capital = Current Assets – Current Liabilities. When a company purchases fixed assets like machinery, there are two possible scenarios: • Cash purchase → Cash (a current asset) decreases, which reduces working capital. • Credit purchase → Creditors (a current liability) increase, which also reduces working capital. Thus, in either case, the purchase of new machinery results in a reduction of working capital, even though it simultaneously increases the fixed assets and total assets of the company.