How might expansion of the e-waste division affect cash flow?

• A. Cash flow will immediately increase with no risk.
• B. Expansion may reduce cash flow in the short term due to capital spending, though it could improve inflows later if sales rise.
• C. Working capital needs collapse.
• D. Cash flow is unaffected.

Answer: (B)

Expanding a division changes cash flow mainly through timing of cash movements. The initial step in expansion is usually a sizable investment in equipment, facilities, or other capital expenditures. That cash outflow happens now and tends to reduce cash flow in the period it occurs. If the expansion succeeds and sales rise, cash inflows from customers should increase later, boosting operating cash flow as revenue and possibly margin grow. However, this outcome depends on demand, prices, and how well the business can convert that extra capacity into sales, so the later gains aren’t guaranteed.

It’s also common for expansion to raise working capital needs—more inventory, accounts receivable, and other short-term assets require cash—so the overall effect on cash flow can be more complex in the short term.

That’s why this option fits best: expansion may reduce cash flow in the short term due to capital spending, though it could improve inflows later if sales rise. The other ideas don’t reflect this realistic timing: cash flow isn’t immediately higher with no risk, working capital needs don’t typically collapse, and cash flow isn’t unchanged by a major expansion.