Six Twelve, Inc., is considering opening up a new convenience store in downtown

Question

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 $600,000. 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).)

Explanation / Answer

cash and cash-equivalent/revenue = 0.03

cash and cash-equivalent/= 0.03*600000 =$18000

receivables/revenue = 0.05

receivables = 0.05*600000 =$30000

inventories/revenue = 0.1

inventories = 0.1*600000 =$60000

payables/revenue = 0.04

payables = 0.04*600000 =$24000

Increase in working capital = increase in current asset - increase in current liability

=(30000+60000+18000) -24000 =$84000

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