A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $ 1 comma 400 comma 000 $1,400,000. This in turn would cause inventory to increase by $ 175 comma 000 $175,000, accounts receivable to increase by $ 140 comma 000 $140,000, and accounts payable to increase by $ 60 comma 000 $60,000. What is the firm's expected change in net working capital?

The firm's expected change in net working capital: Net working capital increases by $255,000

Explanation:

Net working capital is calculated by using following formula:

Net working capital = Current assets - Current Liabilities

The inventory increases by $175,000, accounts receivable increases by $140,000.

The Current assets increases by: $175,000 + $140,000 = $315,000

The accounts payable increases by $60,000, the Current Liabilities increases by $60,000

Net working capital increases by: $315,000 - $60,000 = $255,000

$255,000

Explanation:

As we Know Working capital is the the net or current assets and current liabilities.

Increase in Current Assets

Accounts receivable    $140,000

Inventories                   $175,000

Total Increase in CA   $315,000

Increase in Current Liabilities

Accounts payable       $60,000

Increase in Working Capital =  Increase in Current Assets - Increase in Current Liabilities

Change in Working Capital = $315,000 - $60,000 = -$255,000

As current Liabilities increased more than the current assets, so the working capital will decrease by $255,000

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