Question

A firm had after-tax income last year of $1.2 million. Its depreciation expenses were $ 0.4 million, and its total cash flow was $1.2 million. What happened to net working capital during the year? (Enter your answer in millions rounded to 1 decimal place.)

Answer 1

Answer:

Net working capital is increased by $0.4 million during the year

Explanation:

Net working capital is the net value of current assets and current liabilities for the period. The change in cash during the period also affects the working capital.

First we need to calculate the operating cash flows

Operating cash flow = Aftertax income + Depreciation Expense

Operating cash flow = $1.2 million + $0.4 million

Operating cash flow = $1.6 million

The change in working capital can be calculated as follow

Change in working capital = Operating cash flow - Total cash flow

Change in working capital = $1.6 million - $1.2 million

Change in working capital = $0.4 million

Hence The networking capital is increased by $0.4 million ( assuming there is no change in current liabilities )