In: Accounting
Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates (in millions of dollars): | |||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Cash | 6 | 12 | 15 | 15 | 15 |
Accounts receivable | 21 | 22 | 24 | 24 | 24 |
Inventory | 5 | 7 | 10 | 12 | 13 |
Accounts payable | 18 | 22 | 24 | 25 | 30 |
Assuming that Castle View currently does not have any working capital invested in this division, calculate the cash flows associated with changes in working capital for the first five years of this investment. | |||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Cash | 6.00 | 12.00 | 15.00 | 15.00 | 15.00 |
Accounts receivable | 21.00 | 22.00 | 24.00 | 24.00 | 24.00 |
Inventory | 5.00 | 7.00 | 10.00 | 12.00 | 13.00 |
Accounts payable | 18.00 | 22.00 | 24.00 | 25.00 | 30.00 |
Net Working Capital | |||||
Net change in working capital |
Solution
I have added another line for cash outflow.
The net change in working capital is that amount of cash outflow. If the amount is in negative that means net working capital decreases.
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Cash | $ 6.00 | $ 12.00 | $ 15.00 | $ 15.00 | $ 15.00 |
Accounts receivable | $ 21.00 | $ 22.00 | $ 24.00 | $ 24.00 | $ 24.00 |
Inventory | $ 5.00 | $ 7.00 | $ 10.00 | $ 12.00 | $ 13.00 |
Accounts payable | $ 18.00 | $ 22.00 | $ 24.00 | $ 25.00 | $ 30.00 |
Net Working Capital | $ 14.00 | $ 19.00 | $ 25.00 | $ 26.00 | $ 22.00 |
Net change in working capital | $ 14.00 | $ 5.00 | $ 6.00 | $ 1.00 | $ (4.00) |
Net cash (outflow) inflow | $ (14.00) | $ (5.00) | $ (6.00) | $ (1.00) | $ 4.00 |
Net working capital = Current assets - Current liabilities.........
Net working capital = Cash+Accounts receivable+Inventories-Accounts payable.