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The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30 000 and the machine will be depreciated using the straight-line method over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2 000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%.
-The change in net working capital from year 1 to year 2 is closest to:
A)an increase of $396
B)a decrease of $360
C)a decrease of $396
D)an increase of $360

Question

Quizplus · Accepted Answer

To calculate the change in net working capital (NWC) from year 1 to year 2, we first need to determine the sales for each year and then calculate the NWC for each year. Year 1 sales: 2,000 canes at $18 each = $36,000.Year 2 sales: Year 1 sales * 1.10 (10% growth) = $36,000 * 1.10 = $39,600.NWC is calculated as (Cash + Accounts Receivable + Inventory) - Accounts Payable. Year 1 NWC:- Cash = 2% of $36,000 = $720- Accounts Receivable = 4% of $36,000 = $1,440- Inventory = 9% of $36,000 = $3,240- Accounts Payable = 5% of $36,000 = $1,800NWC for Year 1 = ($720 + $1,440 + $3,240) - $1,800 = $3,600.Year 2 NWC:- Cash = 2% of $39,600 = $792- Accounts Receivable = 4% of $39,600 = $1,584- Inventory = 9% of $39,600 = $3,564- Accounts Payable = 5% of $39,600 = $1,980NWC for Year 2 = ($792 + $1,584 + $3,564) - $1,980 = $3,960.Change in NWC from Year 1 to Year 2 = Year 2 NWC - Year 1 NWC = $3,960 - $3,600 = $360.Therefore, the change in net working capital from year 1 to year 2 is an increase of $360.

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