Question

Kenear, Inc., has a new project in mind which will increase accounts receivable by $13,000, increase accounts payable by $9,000, increase fixed assets by $11,000, and decrease inventory by $20,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when they analyze this project?

Answer 1

Answer:

$16,000

Explanation:

The computation of the net working capital is shown below:

= - Increase in accounts receivable +  Increase in accounts payable + decrease in inventory

= - $13,000 + $9,000 + $20,000

= $16,000

The increase in the fixed assets would not be considered as it is not a part of working capital. The working capital only includes current liabilities and current assets.

The increase in accounts payable and a decrease in inventory increase the cash flows whereas the increase in accounts receivable decreases the cash flows. So according to this, we made the adjustment which is shown above.