Table 15.2 The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-If the firm was to shift $3,000 of current assets to fixed assets, the firm's net working capital would ________, the annual profits on total assets would ________, and the risk of technical insolvency would ________, respectively. (See Table 15.2)
A) increase; decrease; increase
B) decrease; increase; decrease
C) increase; decrease; decrease
D) decrease; increase; increase

Question

Table 15.2  The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-If the firm was to shift $3,000 of current assets to fixed assets, the firm's net working capital would ________, the annual profits on total assets would ________, and the risk of technical insolvency would ________, respectively. (See Table 15.2)
A) increase; decrease; increase 
B) decrease; increase; decrease 
C) increase; decrease; decrease 
D) decrease; increase; increase

Quizplus · Accepted Answer

Shifting current assets to fixed assets decreases net working capital, increases profits on total assets due to higher asset utilization, and increases the risk of technical insolvency due to reduced liquidity.

Table 152 the Company Earns 5 Percent on Current Assets