Jeff's Stereo Sound is expanding its product offerings to reach a wider range of customers.The expansion project includes increasing the floor inventory by €150,000 and increasing its debt to suppliers by 50% of that amount.The company will also spend €200,000 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 trade receivables 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 can be calculated as follows:

Increase in floor inventory = €150,000 
Increase in debt to suppliers = 50% of €150,000 = €75,000 
Increase in trade receivables = €25,000

Therefore, the total increase in net working capital = €150,000 + €75,000 + €25,000 = €250,000

Since this is an initial cash outflow, the amount should be negative. Therefore, the answer is B) €100,000, which is the closest negative value to €250,000.

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