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12 August, 05:13

You are purchasing an equipment for $ 200,000 for your new store. Assume the store has no other expenses or revenues other than those associated with this project. You are going to purchase an additional $ 12,500 of inventory for production with the new equipment and set up a cash account with a $ 2,000 balance. The inventory purchase will result in an account payable of $ 4,500. The firm's tax rate is 20%. What is the net cash flow at time zero?

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  1. 12 August, 05:32
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    Negative cash balance of $210,000.

    Explanation:

    Given that,

    cost of equipment = $200,000

    Inventory purchased = $12,500

    Cash balance = $2,000

    Accounts payable = $4,500

    Net cash flow at time zero:

    = (cost of equipment) + (Increase in working capital)

    = ($200,000) + (Inventory purchased + cash balance - Accounts payable)

    = ($200,000) + ($12,500 + $2,000 - $4,500)

    = ($200,000) + ($10,000)

    = ($210,000)

    Note: Negative values are in the parenthesis.
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