Your new retail store needs $150,000 worth of merchandise to fill the shelves and racks for...

Transcribed Image Text:

Your new retail store needs $150,000 worth of merchandise to fill the shelves and racks for the day it opens for business (t-0). This is inventory, and inventory is one of the elements of Net Working Capital (NWC). Since you had to spend $150,000 to purchase that inventory, that would be cash outflow at t=0. Each period, we track the changes in NWC to see if there were cash outflows or inflows. For example, if you increased inventory to $160,000 by the end of year 1, that would be a cash outflow of $10,000, since we had to spend $10,000 to increase the inventory level from $150,000 to $160,000. In other words, if NWC goes up, it is a cash outflow; if NWC goes down, it is a cash inflow. Assume you purchased that $150,000 worth of inventory at t-0. Now assume that you increase inventory by $10,000 at the end of year 1, and increase inventory another $25,000 at the end of year 2. At this point, your inventory is $150k+$10k+$25k = $185,000. Now say that you will close the business at the end of year 3, so you stop buying inventory and begin to sell off your inventory. On the last day you are open, you sell your last items out of inventory, and inventory has now gone from $185,000 at the beginning of the year to $0 at the end of the year. Calculate the change in NWC for t=0, t-1, t-2 and t-3, properly noting which is a cash inflow versus outflow. Take the NPV of these numbers, using a cost of capital of 10%. What do you get? (Hint: it should be a negative number) Your new retail store needs $150,000 worth of merchandise to fill the shelves and racks for the day it opens for business (t-0). This is inventory, and inventory is one of the elements of Net Working Capital (NWC). Since you had to spend $150,000 to purchase that inventory, that would be cash outflow at t=0. Each period, we track the changes in NWC to see if there were cash outflows or inflows. For example, if you increased inventory to $160,000 by the end of year 1, that would be a cash outflow of $10,000, since we had to spend $10,000 to increase the inventory level from $150,000 to $160,000. In other words, if NWC goes up, it is a cash outflow; if NWC goes down, it is a cash inflow. Assume you purchased that $150,000 worth of inventory at t-0. Now assume that you increase inventory by $10,000 at the end of year 1, and increase inventory another $25,000 at the end of year 2. At this point, your inventory is $150k+$10k+$25k = $185,000. Now say that you will close the business at the end of year 3, so you stop buying inventory and begin to sell off your inventory. On the last day you are open, you sell your last items out of inventory, and inventory has now gone from $185,000 at the beginning of the year to $0 at the end of the year. Calculate the change in NWC for t=0, t-1, t-2 and t-3, properly noting which is a cash inflow versus outflow. Take the NPV of these numbers, using a cost of capital of 10%. What do you get? (Hint: it should be a negative number)