Change in Working Capital: Scenario 1What would happen if the company employs better technology to improve the efficiency of the production process?The working capital requirement will increaseThe working capital requirement will remain the sameThe working capital requirement will decrease
Question
Change in Working Capital: Scenario 1What would happen if the company employs better technology to improve the efficiency of the production process?The working capital requirement will increaseThe working capital requirement will remain the sameThe working capital requirement will decrease
Solution
The working capital requirement will likely decrease. Here's why:
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Employing better technology to improve the efficiency of the production process means that the company can produce the same amount of goods using less resources. This could mean less raw materials, less time, or less labor.
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This efficiency could lead to a decrease in the company's current liabilities, as they may not need to borrow as much to fund their operations.
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At the same time, the company's current assets may also decrease, as they may not need to hold as much inventory due to the improved efficiency.
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The net effect of these changes is a decrease in the company's working capital requirement.
Remember, working capital is calculated as current assets minus current liabilities. If both current assets and current liabilities decrease, but liabilities decrease more, the result is a decrease in working capital.
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