Business – 5.2 Sources of finance – Internal and external sources | e-Consult
5.2 Sources of finance – Internal and external sources (1 questions)
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Model Answer:
The sale of the obsolete asset generates an immediate cash inflow of £50,000, increasing current assets and therefore working capital. The sale‑and‑leaseback provides a further cash inflow of £250,000, but creates a lease liability.
Overall effect can be illustrated as follows:
| Item | Before Transaction | After Transaction |
| Cash | £X | £X + £300,000 |
| Non‑current assets (machines) | £Y (including obsolete machine) | £Y – £value of obsolete machine + £300,000 (new machine recorded as right‑of‑use asset) |
| Lease liability | £0 | £250,000 |
| Working capital (Current assets – Current liabilities) | £W | £W + £300,000 (cash increase) – any increase in current liabilities (none in this case) |
Key points:
- Cash inflow improves liquidity and short‑term solvency.
- The lease creates a long‑term liability, affecting the debt‑to‑equity ratio.
- The firm replaces an unproductive asset with a modern one, potentially enhancing operational efficiency.
- Working capital rises because the cash received is not offset by an increase in current liabilities.