Glass Blowers, Inc. has a new project in mind that will increase accounts receivable by $18,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and decrease inventory by $11,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

Question

Quizplus · Accepted Answer

The initial cash flow attributable to net working capital is calculated as the change in current assets minus the change in current liabilities. The increase in accounts receivable ($18,000) and the decrease in inventory (-$11,000) result in a net increase in current assets of $7,000. The decrease in accounts payable ($6,000) results in a decrease in current liabilities. Therefore, the net change in net working capital is $7,000 - $6,000 = $1,000. Since this is an increase in net working capital, it is a cash outflow, so the initial cash flow is -$1,000.