Question

Six Twelve, Inc., is considering opening up a new convenience store in downtown New York City. The expected annual revenue at the new store is $720,000. To estimate the increase in working capital, analysts estimate the ratio of cash and cash-equivalents to revenue to be 0.03 and the ratios of receivables, inventories, and payables to revenue to be 0.05, 0.10, and 0.04, respectively, in the same industry. What is the expected incremental cash flow related to working capital when the store is opened? (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Incremental cash flow

$

Answer 1

Calculation of cash outfow related to working capital at the the time of opening the store:

Accounts receivables, accounts payables,cash and inventories are all form part of working capital.

Ratio of cash and cash-equivalents to revenue =0.03 ($720,000 * 0.03 =$21,600)

Ratio of receivables = 0.05 ($720,000 * 0.05 =$36,000)

Ratio of inventories= 0.10 ($720,000 * 0.10 =$72,000)

Ratio of payables to revenue=0.04 ($720,000 * 0.04 =$28,800)

=$720,000 * (.03 + 0.05 + 0.10 - 0.04)

=$100,800

(OR)

=$21,600 + $36,000 + $72,000 - $28,800

=$100,800