Question

An investment will require an increase in the following working capital items: Cash 1,000,000 Accounts 3,000,000...

An investment will require an increase in the following working capital items:

Cash 1,000,000

Accounts 3,000,000

Inventories 6,000,000

It is also expected that current liabilities will increase by $4 million. How will the preceding items affect the cash flows of the investments?

Homework Answers

Answer #1
The increase in net working capital would result in cash outflow for investment purpose
Net working capital (Increase in cash+Increase in accounts receivable+Increase in inventory)-Increase in current liabilities
Net working capital (1000000+3000000+6000000)-4000000
Net working capital 10000000-4000000
Net working capital $6,000,000
Thus, there would be cash outflow of $6,000,000 and thus cost of investment would increase
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