Question

Your company is considering expanding its retail outlet. Currently, inventory levels are $5,000. With the expansion, it is expected that inventory levels will need to be $9,500. It is expected that accounts receivable will increase by $4,000 and account payable will decrease by $10,000. The expansion of the building will cost $120,000. What change in net working capital is this expansion causing

Answer 1

Answer:

Change is net working capital is -$18,500(use of cash)

Explanation:

Due to the expansion inventory would increase by $4,500 ($9,500-$5,000)

Accounts receivable would also increase by $4,000 over its previous amount.

Accounts payable would reduce by $10,000 as compared to previous balance of accounts payable

The change in net working capital=$4,500+$4,000+$10,000=$18,500

This is a use of cash not a source of cash inflow