Pedersen Industries wants to initiate a new project. To facilitate the project, an increase in cash of $20,000 will be required and the firm needs to build up $15,000 in inventory. The firm is expecting revenues of $500,000 per year and cost of goods sold (COGS) of $400,000. Pedersen Industries is expecting that Accounts Receivables (AR) will account for 5% of annual sales and Accounts Payables (AP) will account for 10% of COGS. All these changes will occur in year t=1.

What is the incremental cash flow effect from the change in Net Working Capital (NWC) in year 1?

Question

Pedersen Industries wants to initiate a new project. To facilitate the project, an increase in cash of $20,000 will be required and the firm needs to build up $15,000 in inventory. The firm is expecting revenues of $500,000 per year and cost of goods sold (COGS) of $400,000. Pedersen Industries is expecting that Accounts Receivables (AR) will account for 5% of annual sales and Accounts Payables (AP) will account for 10% of COGS. All these changes will occur in year t=1.

​

What is the incremental cash flow effect from the change in Net Working Capital (NWC) in year 1?

BlackTom AI · Accepted Answer

Change in net working capital (ΔNWC) equals increases in current assets minus increases in current liabilities; the cash flow effect in year 1 is the negative of that increase (a rise in NWC is a use of cash).

1) Relevant concepts
- NWC = Current assets (excluding short-term debt) − Current liabilities.  
- An increase in current assets (cash, inventory, AR) is a use of cash (negative cash flow).  
- An increase in current liabilities (AP) is a source of cash (positive cash flow).  
- Incremental cash flow from NWC = −ΔNWC (i.e., cash outflow when NWC rises).

2) Step-by-step reasoning and calculations
- Increase in cash required: +$20,000 (current asset increase → use of cash)  
- Inventory buildup: +$15,000 (current asset increase → use of cash)  
- Accounts receivable: 5% of sales = 0.05 × $500,000 = $25,000 (increase in AR → use of cash)  
- Accounts payable: 10% of COGS = 0.10 × $400,000 = $40,000 (increase in AP → source of cash)

3) Intermediate arithmetic
- Total increase in current assets = $20,000 (cash) + $15,000 (inventory) + $25,000 (AR) = $60,000  
- Total increase in current liabilities = $40,000 (AP)  
- Net increase in NWC = $60,000 − $40,000 = $20,000

4) Why the correct answer is correct
- The firm’s NWC rises by $20,000 in year 1, which is a use of cash. Therefore the incremental cash flow effect is −$20,000.

5) Why other options are incorrect
- −$45,000 and −$30,000: reflect incorrect aggregation of increases (they mis-sum assets or liabilities).  
- $20,000 and $45,000: have the wrong sign (they treat a rise in NWC as a cash inflow rather than an outflow).

6) Conclusion
- The incremental cash flow effect from the change in NWC in year 1 is −$20,000, matching the provided correct answer.

类似问题

Which one of the following will decrease the value of a firm's net working capital?

Net working capital equals current assets Blank ______ current liabilities.

The difference between a firm's current assets and its current liabilities is called:

Question at position 6 Net working capital equals:Total assets − total liabilitiesEquity − debtCash − debtCurrent assets − current liabilities

At the beginning of the year, a firm has current assets of $313 and current liabilities of $217. At the end of the year, the current assets are $463 and the current liabilities are $257. What is the change in net working capital?

Name the Supreme Court decision that removed financial constraints on PACs.

Political scientists Joshua Kalla and David Broockman find that senior policy makers made themselves available to _____ between three and four times more often than they did to constituents.

Name the political scientist who argues that parties are designed to serve the needs of ambitious politicians (namely candidates and officeholders).

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单