*Problem 11.10 Six Twelve, Inc., is considering opening up a new convenience sto

ID: 2651402 • Letter: #

Question

*Problem 11.10 Six Twelve, Inc., is considering opening up a new convenience store in downtown New York City. The expected annual revenue at the new store is $900,000. To estimate the increase in working capital, analysts estimate the ratio of cash and cash-equivalents to revenue to be 0.03 and the ratios of receivables, Inventories, and payables to revenue to be 0.05, 0.10, and 0.04, respectively, in the same industry. What Is the Incremental cash flow related to working capital when the store Is opened? (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Incremental cash flow ________ $

Explanation / Answer

Answer

Figures in $

Particulars

Ratio

Amount

Expected Annual revenue

900000

Estimated ratio for increase in working capital

Cash and cash equivalents to revenue (a)

0.03

27000

(0.03*900000)

Receivables to revenue (b)

0.05

45000

(0.05*900000)

Inventories to revenue (c)

0.1

90000

(0.1*900000)

Increase in current assets (a+b+c) (E)

162000

Payables to revenue (d)

0.04

36000

(0.04*900000)

Increase in current liabilities (d) (F)

36000

Incremental cash out flow related to working capital (F-E)

-126000

on opening of new store