Question

If the directors approve the new warehouse Christopher anticipates that its current inventory of $4.5 million will increase by $2 million. In addition, accounts receivables will increase from $4.3 million to $5 million. There is some debate regarding whether these amounts should be included in the final year of the analysis. Currently, accounts payable are $1.8 million and you expect that this figure will not change if Christopher purchases the warehouse.

Can someone tell me if this should go into the final year of cash flows? and if so, what should the values be?

Answer 1

Due to new warehouse, inventory will increase by $2 million. It means because of new warehouse, we will have to make investment of $2,000,000 in inventory.

So in final year of cash flows, -2000000 will be considered for cash flow, as this is investment and outflow.

Due to new warehouse, accounts receivable will increase from $4.3 million to $5 million, it increase by 0.7 million. It means due to warehouse, Investment in Accounts receivables will be $700000.

So in final year of cash flows -700,000 will be considered as it is Investment and generating cash outflow.

Due to new warehouse, Accounts payable is not effected, so there is neither increase nor decrease in Investment. So no effect on cash flows will be there.

So, in final year of cash flows

Investment in inventory =. - $2,000,000

Investment in Accounts receivables = -$700,000

Total Investment in working capital = -$27,000,000