Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:

-A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1 000 000. This in turn would cause inventory to increase by $150 000, accounts receivable to increase by $100 000, and accounts payable to increase by $75 000. What is the firm's expected change in net working capital?
A)$325 000
B)$175 000
C)$250 000
D)$1 175 000

Question

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
 
-A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1 000 000. This in turn would cause inventory to increase by $150 000, accounts receivable to increase by $100 000, and accounts payable to increase by $75 000. What is the firm's expected change in net working capital?
A)$325 000 
B)$175 000 
C)$250 000 
D)$1 175 000

Quizplus · Accepted Answer

Net working capital is calculated as current assets minus current liabilities. The increase in sales impacts inventory and accounts receivable, increasing current assets by $250,000 ($150,000 + $100,000). The increase in accounts payable, a current liability, is $75,000. The change in net working capital is the increase in current assets minus the increase in current liabilities, which is $250,000 - $75,000 = $175,000.

Use the Information for the Question(s)below