Question

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 straight line over its​ three-year life to a residual value of​ $0.  

The cane manufacturing machine will result in sales of 2400 canes in year 1. Sales are estimated to grow by 8​% per year each year through year 3. 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, 5​% of its annual sales in accounts​ receivable, 10​% of its annual sales in​ inventory, and 5​% of its annual sales in accounts payable. The firm is in the​ 35% tax bracket and has a cost of capital of 9​%. The change in net working capital from year 1 to year 2 is closest​ to:

Answer 1

Answer -

Increase in Sales from year 1 to year

=Price per Cane *Sales in units *Growth

=18*2400*1.08%

=43200+3456=46656

The net increase in Working Capital =(Percentage in cash + Percentage in Account Receivables +Percentage in inventory -Percentage in accounts Payable)

=(2%+5%+10%-5%)

=12%

The change in net working capital from year 1 to year 2 is closest​ to:

12%*Increase in Sales

=12%*3456

=414.72 ($415)

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