Question

In: Finance

You company is considering launching a new product that will increase inventory by $50,000 and increase...

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

Cash outflow of $73,000

Cash inflow of $27,000

Cash outflow of $27,000

Solutions

Expert Solution

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


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