Question

Associated with a firm’s planned purchase of new $250,000 equipment is an immediate
decrease in inventory of $60,000. Should this figure be ignored in a capital budgeting analysis
of the new equipment? Explain. What about the $50,000 cash that the firm already has that
will reduce the equipment cost to $200,000?

Answer 1

Answer 1:

The purchase of new equipment is an important figure which can not be ignored in a capital budgeting analysis.

The purchaseof new equipment will increase the Balance sheet by increasing the fixed asset of $250000. Since the inventory is decreased, then it will reduce the current assets of the company and increase the revenue of the company. There is a chance to increase the cash flow of the company and improve the NPV of the company.

The Balance sheet is shown below:

Particulars	Amount
Fixed Asset	250000
Inventory	(60000)
Change in Total Assets	190000

Answer 2:

If the company purchase the new equipment by paying cash payment of $50000, then the remaining amount of the purchase will come under liabilities of the company. The equipment cost will remain same.

The balance sheet is shown below:

Assets	amount	Liabilities	amount
Fixed Asset	250000	Debt	200000
Cash	(50000)
Total Assets	200000	Total Liabilities	200000