A proposed project will reduce the amount of inventory a firm must keep on hand.This effect:

Question

Quizplus · Accepted Answer

The reduction in inventory will result in an initial cash inflow, which should be included in the analysis of the project. This inflow represents a decrease in the required investment in inventory, which will free up cash that can be used elsewhere. Therefore, option A and D are incorrect, as the effect should not be ignored nor is it a negative capital expenditure. Option E is also incorrect, as an erosion cost usually refers to a decrease in revenue, and this effect does not involve a decrease in revenue. Option B is incorrect, as the reduction in inventory is not a cash outflow, but rather a reduction in the amount of cash that must be invested in inventory.

A Proposed Project Will Reduce the Amount of Inventory a Firm