Jeff’s Stereo Sound is expanding its product offerings to reach a wider range of

Question

Jeff’s Stereo Sound is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $150,000 and increasing its debt to suppliers by 50% of that amount. The company will also spend $200,000 for a building contractor to expand the size of the showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $25,000. For the project analysis, what amount should be used as the initial cash flow for net working capital?

Explanation / Answer

Initial NWC requirement = $150,000 - (.50×$150,000) + $25,000 = $100,000

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