Which one of the following is a situation where a new project will require a cash investment in net working capital?
A) Inventory levels will be reduced when the project is introduced.
B) All sales related to the project will be cash sales to a subsidiary.
C) The project will increase inventory more than accounts payable.
D)The project will require additional inventory which will be financed by a supplier.

Question

Quizplus · Accepted Answer

If the project will increase inventory more than accounts payable, the company must invest cash in net working capital to finance the inventory buildup. As a result, the company will need to invest in additional inventory and might need to extend more credit to suppliers to purchase additional inventory. The supplier might require the company to pay cash upfront or make deposits to cover the cost of inventory purchased on credit, which increases the cash investment in net working capital. Therefore, the project requires a cash investment in net working capital. Options A and B do not require investments in working capital because inventory levels will be lower, and sales are made for cash transactions. Option D suggests financing from a supplier instead of using the company's cash reserves to finance working capital.

Which One of the Following Is a Situation Where a New