Question

Problem 11.10 Your answer is incorrect. Try again. Six Twelve, Inc., is considering opening up a new convenience store in downtown New York City. The expected annual revenue at the new store is $890,000. To estimate the increase in working capital, analysts estimate the ratio of cash and cash-equivalents to revenue to be 0.03 and the ratios of receivables, inventories, and payables to revenue to be 0.05, 0.10, and 0.04, respectively, in the same industry. What is the expected incremental cash flow related to working capital when the store is opened? Incremental cash flow 112000

Answer 1

Increase in revenue = $890,000

Increase in working capital = Increase in current assets - increase in current liabilities

=(3% + 5% + 10%) - 4%

= 14%

Increase in working capital is 14%.

While calculation of working capital we deduct increase in working capital from operating income.

So, increase in cashf low = $890,000 × (1 - 14%)

= $765,400

Increase in cash flow is $765,400.