Table 14.2 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 $7,000 of fixed assets to current assets, the firm's net working capital would ________, the annual profits on total assets would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 14.2)

Question

Table 14.2  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 $7,000 of fixed assets to current assets, the firm's net working capital would ________, the annual profits on total assets would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 14.2)

Quizplus · Accepted Answer

Shifting $7,000 of fixed assets to current assets would increase the net working capital. This is because current assets would increase by $7,000 while current liabilities remain the same, resulting in an increase in net working capital.

However, the annual profits on total assets would decrease, as the company earns a lower return (5 percent) on current assets compared to fixed assets (15 percent). This would result in a decrease in overall profitability.

The risk of not being able to meet current obligations would decrease, as the firm would have more liquid assets (i.e. current assets) to cover its short-term liabilities. Therefore, the correct answer is choice C.

Table 142 the Company Earns 5 Percent on Current Assets