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Determine the change in net working capital that appears warranted for the following proposed project: Inventory...

Determine the change in net working capital that appears warranted for the following proposed project: Inventory levels will increase 20% from their current value of 500,000; machinery will increase by $75,000; accounts receivable because of a new collection system will increase by only $15,000; accounts payable will increase by $45,000. What happens to net working capital at the end of the projects life?

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Expert Solution

Ans- It is given in the question that we have to find the changes in the net working capital at the end of the project life. For that, we have to find changes in the current assets and current liabilities, and then we will adjust it accordingly.

Calculating the increase in current assets.

It is given that inventory level will increase by 20% i.e 20% of $500000 = $100000

Increase in account receivables - $15000

Therefore the total increase in current assets will be 100000+15000= 115000

Now, calculating the increase in current liabilities

It is given in the question that accounts payable will increase by $45000.So the total increase in liabilities is ($45000).

Now changes in net working capital will be- Increase in current assets- Increase in current liability.

$115000-$45000= $70000.

Therefore Net changes in working capital are $70000

Point to note:- We havent taken increase in machinery in account because it is a fixed asset it cant be considered while calculating working capital.

jeff jeffy answered 1 year ago
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