Question

Jeff’s Stereo Sound is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $74515 and increasing its debt to suppliers by 77% of that amount. The company will also spend $233997 for a building contractor to expand the size of the showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $16263. For the project analysis, what amount should be used as the initial cash flow for net working capital?

Answer 1

Solution:

The amount of Initial Net working capital is calculated as follows

= Net increase in Current Assets – Net Increase Current Liabilities

As per the information given in the question we have

Increase In Inventory = Increase in current assets = $ 74,515 ;

Increase in Debt to suppliers = Increase in Current Liabilities = 77 % of Increase in Inventory = 77 % * $ 74,515

= $ 57,376.5500

Increase in accounts receivable = Increase in current assets = $ 16,263

The amount of $ 233,997 spent by the company for a building contractor to expand the size of the showroom is an investment in fixed asset and not current asset ; Hence, it is not considered for the purpose of calculation of Initial Net working capital.

Thus the amount that should be used as the initial cash flow for net working capital

= Increase in Inventory + Increase in accounts receivable - Increase in Debt to suppliers

= $ 74,515 + $ 16,263 - $ 57,376.55

= $ 33,401.45

= $ 33,401 ( when rounded off to the nearest whole number )

Thus the amount that should be used as the initial cash flow for net working capital = $ 33,401