Heremy's Flooring is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $175,000 and increasing its debt to suppliers by 50% of that amount. The company will also spend $270,000 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 $25,000. For the project analysis,what amount should be used as the initial cash flow for net working capital?

Question

Quizplus · Accepted Answer

The initial cash flow for net working capital is the change in net working capital, which is the change in current assets minus the change in current liabilities. In this case, the change in current assets is the increase in inventory ($175,000) plus the increase in accounts receivable ($25,000), which is $200,000. The change in current liabilities is the increase in debt to suppliers, which is 50% of the increase in inventory, or $87,500. Therefore, the change in net working capital is $200,000 - $87,500 = $112,500.

Heremy's Flooring Is Expanding Its Product Offerings to Reach a Wider