Suppose an investment requires the company to increase inventories by $30,000 at the beginning of the project. However, the financial manager expects that accounts payable will increase by $10,000 initially. The company's marginal tax rate is 40 percent. The effect of this change in inventory and accounts payable on the initial cash outlay closest to:

Question

Quizplus · Accepted Answer

The initial cash outlay is affected by the net change in working capital, which is the increase in inventories ($30,000) minus the increase in accounts payable ($10,000), resulting in a net increase of $20,000. Taxes do not affect this calculation as it involves changes in balance sheet accounts, not taxable income. Therefore, the effect on the initial cash outlay is -$20,000.

Suppose an Investment Requires the Company to Increase Inventories by $30,000