Dollar Diamond is considering a project which will require additional inventory of $134,000 and will also increase accounts payable by $37,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $100,000 and are expected to increase by 8% if this project is accepted. What is the initial project cash flow related to net working capital?

Question

Quizplus · Accepted Answer

The initial project cash flow related to net working capital is calculated as the change in current assets minus the change in current liabilities. The additional inventory requires $134,000, and accounts receivable will increase by 8% of $100,000, which is $8,000. Therefore, the total increase in current assets is $134,000 + $8,000 = $142,000. The increase in accounts payable, a current liability, is $37,000. Thus, the net change in working capital is $142,000 - $37,000 = $105,000. Since this is an increase in working capital, it represents a cash outflow, so the initial project cash flow related to net working capital is -$105,000.

Dollar Diamond Is Considering a Project Which Will Require Additional