Hunter's Hut is considering a project that will require additional inventory of $48,000 and will increase accounts payable by $22,000. Accounts receivable is currently $297,000 and is expected to increase by four percent if this project is accepted. What is the project's initial cash flow for net working capital?
A) −$37,880
B) −$81,880
C) −$42,250
D) −$66,550
E) −$27,550

Question

Quizplus · Accepted Answer

The project's initial cash flow for net working capital is calculated as the change in current assets minus the change in current liabilities. The additional inventory is a $48,000 increase in current assets, and the increase in accounts payable is a $22,000 increase in current liabilities. The increase in accounts receivable is 4% of $297,000, which equals $11,880. Therefore, the total change in current assets is $48,000 (inventory) + $11,880 (accounts receivable) = $59,880. The change in net working capital is then $59,880 (change in current assets) - $22,000 (change in current liabilities) = $37,880. Since this is an increase in working capital, it represents a cash outflow, so the initial cash flow for net working capital is -$37,880.

Hunter's Hut Is Considering a Project That Will Require Additional