Suppose you have an investment that costs you $10,000 per year, doesn\'t increas

Question

Suppose you have an investment that costs you $10,000 per year, doesn't increase sales, provides no depreciation expense or interest expense but lowers the amount of inventory you need to keep on hand by $120,000.

Could this be a good idea?

A) No, this will only result in a net increase in taxes.

B) Yes, but only if the MARR is something very very low, near 1%.

C)Yes, it frees working capital in the first year and that represents an increase in the net cash flow that year.

D) No, this investment always decreases net income.

A) No, this will only result in a net increase in taxes.

B) Yes, but only if the MARR is something very very low, near 1%.

C)Yes, it frees working capital in the first year and that represents an increase in the net cash flow that year.

D) No, this investment always decreases net income.

Explanation / Answer

Answer: Option -C

The above strategy leads to make available the company an additional cashflow of $110,000 ($120,000 - $10,000) in the first year, making this money available for companies fixed and woking capital investments. But this strategy work to the benefit of the company if the opportunity cost of the working capital released is more than $10,000.

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