A company expects revenue to increase from $10m to $12m next year. Cost of sales is 70% of revenue. It will maintain receivables at 45 days of revenue, inventory at 60 days of cost of sales and trade payables at 40 days of cost of sales. What is the increase in the net investment in working capital (365-day year, to the nearest $)?

Correct answer: A) $323,288

Explanation

Increase in revenue = $2,000,000; increase in cost of sales = $1,400,000. Receivables rise by 2,000,000 x 45/365 = $246,575; inventory by 1,400,000 x 60/365 = $230,137; payables by 1,400,000 x 40/365 = $153,425. Net increase = $246,575 + $230,137 - $153,425 = $323,288 (to the nearest $). $1,939,726 is the total net working capital at the new revenue level, not the increase.