If a project is expected to increase inventory by $17,000,increase accounts payable by $10,000,and decrease accounts receivable by $1,000,what effect does working capital have during the life of the project?
A) Increases investment by $4,000.
B) Increases investment by $5,000.
C) Increases investment by $6,000.
D) Working capital has no effect during the life of the project.

Question

Quizplus · Accepted Answer

Working capital is the difference between current assets and current liabilities. Based on the given information, the project is expected to increase inventory (a current asset) by $17,000 and increase accounts payable (a current liability) by $10,000, which will decrease working capital by $7,000 ($17,000 - $10,000 = $7,000). Additionally, the project is expected to decrease accounts receivable (a current asset) by $1,000, which will increase working capital by $1,000. Therefore, the net effect on working capital during the life of the project is a decrease of $6,000 ($7,000 - $1,000 = $6,000). This means that the investment required to fund the operating cycle of the business will increase by $6,000 during the life of the project, which is best represented by choice C.

If a Project Is Expected to Increase Inventory by $17,000,increase