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 $3,000 of current assets to fixed assets,the firm's net working capital would ________,and the risk of insolvency would ________,respectively.(See Table 14.2)
A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

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 $3,000 of current assets to fixed assets,the firm's net working capital would ________,and the risk of insolvency would ________,respectively.(See Table 14.2)
A)increase; increase 
B)decrease; decrease 
C)increase; decrease 
D)decrease; increase

Quizplus · Accepted Answer

Shifting current assets to fixed assets decreases net working capital, as current assets are reduced. This increases the risk of insolvency because the firm has fewer liquid assets to meet short-term obligations.

Table 142 the Company Earns 5 Percent on Current Assets