Question

Wheels and More needs to maintain 8 percent of its sales in net working capital. The firm is considering a 5-year project which will increase sales from their current level of $110,000 to $146,000, $152,000, $158,000, $164,000, and $155,000 for Years 1 to 5 of the project, respectively. What amount should be included in the project analysis cash flows for net working capital for Year 3 of the project?
A. $12,640
B. -$480
C. -$12,640
D. $0
E. $480

Answer 1

Answer:

E. $480

Explanation:

For computing the included amount, first we have to find out the increase in working capital which is shown below:

Increase in working capital = Increase sales × sales percentage

For Year 1

Increase in working capital = $146,000 × 0.08

                                             = $11,680

For Year 2

Increase in working capital = $152,000 × 0.08

                                             = $12,160

For Year 3

Increase in working capital = $158,000 × 0.08

                                             = $12,640

For Year 4

Increase in working capital = $164,000 × 0.08

                                             = $13,120

For Year 5

Increase in working capital = $155,000 × 0.08

                                             = $12,400

Now net working capital would be

Year 1                   $11,680

Year 2                  $12,160           $480

Year 3                  $12,640          $480

Year 4                  $13,120           $480

Year 5                  $12,400         -$720

We deducted it from the bottom

Like $12,400 - $13,120 = -$720

$13,120 - $12,640 = $480 and so on