Question

If an investor wants to buy a coffee shop for $1million, and wants to make assumptions on its working capital, what could those assumptions be?

Ps: the investment has a horizon of 10 years.

Answer 1

In the given question, The Investor wants to buy a coffee shop for $1million.Since, the investment is yet to be made,the investor must decide in advance whether or not the business is feasible. For computing the net benefit that will arise from the business, the following assumptions in relation to working capital can be made-

1) Assumptions in realtion to accounts receivables-

Account receivable refers to the amount which we will be receiving from our clients/customers for the goods sold or for the srvices rendered to them. Account receivables can be assumed to be a Specific percent of sales". For this assumption to hold good, sales must be predicted acurately.

2) Assumptions in relation to Inventory-

Inventories form the major part of working capital. It is the amount of raw materials kept in the business which will be utilised in the final production of goods.Inventories are normally assumed as a percentage of Cost of goods sold (COGS)

3) Assumptions in relation to Account Payables-

Account payables refers to the amount which we will be paying in near future for the goods sold or for the srvices received by us. Account payables can be assumed to be a Specific percent of Cost of goods sold".

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