In: Finance
You company is considering launching a new product that will increase inventory by $50,000 and increase accounts receivables by $23,000. What is the effect of these change in net working capital (NWC) on cash flow at the beginning of the project?
Cash inflow of $73,000 |
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Cash outflow of $73,000 |
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Cash inflow of $27,000 |
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Cash outflow of $27,000 |
Ans: a) Cash inflow of $ 73,000
Explanatory Solution:
Given:
Increase in Inventory = $ 50,000
Increase in Accounts Receivables = $ 23,000
To Calculate:
The effect of the Increase in Inventory and Accounts Receivables in Change in Net Working Capital (NWC) on Cash Flow at the beginning of the project.
Steps: Calculations:
Formula:
Net Working Capital = Current Assets − Current Liabilities
So,
Change in Net Working Capital = Change in Current Assets − Change in Current Liabilities
Here:
Change in Current Assets are:
1. Inventories = $ 50,000 (Incremental)
2. Accounts Receivables = $ 23,000 (Incremental)
Current Liabilities are not given so remain zero ‘0’ here.
On putting these values in the formula, we get,
Change in Net Working Capital = $ 50,000 + $ 23,000
Change in Net Working Capital = $ 73,000
Note:
Since the inventories and accounts receivable comes in to the business so, they are considered as cash inflows. Also, Inventories and accounts Receivable are Current Assets of the company, so they are cash inflows. And the change is net working capital is positive and incremental so it is considered as Cash Inflow.
So, Change in Net Working Capital = Cash Inflow of $ 73,000
Hence our Answer Option is a) Cash inflow of $ 73,000
Ans: a) Cash inflow of $ 73,000