How does the purchase of a new machinery to expand

production capacity affect the working capital of a company ABC Limited?

A Not affect the working capital Correct Answer Incorrect Answer

B Increase the working capital Correct Answer Incorrect Answer

C Decrease the working capital Correct Answer Incorrect Answer

D Either A or B Correct Answer Incorrect Answer

E Cannot be determined for sure Correct Answer Incorrect Answer

Solution

Working capital is the difference between the current assets and current liabilities. The purchase of fixed assets can be done by 2 ways: • Cash payment – this would reduce cash and therefore the current assets, thereby reducing the working capital • Credit purchase – this would increase the creditors and therefore the current liabilities, thereby again reducing the working capital. Apart from the impact on working capital, this purchase will also increase the Fixed Assets and therefore the total assets of the company.

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