Question

Simpson Corporation expects to sell the following number of units of their newest product: Year Unit...

Simpson Corporation expects to sell the following number of units of their newest product:

Year Unit Sales
1 8,000
2 9,000
3 12,000
4 15,000

The revenue per unit is $180. NWC starts out at $50,000, then rises to 15% of sales. What is the change in cash flow for the NWC balance at the end of year 2?

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Answer #1

Statement showing cash flow cahnges due to NWC

Particulars 0 1 2
Units sold 8000 9000
Price per unit 180 180
Total sales 1440000 1620000
NWC (Note 1) 50000 216000 243000
Change in NWC 166000 27000
Increase in NWC = Decrease in cash -166000 -27000

NWC at end of year 1 = 1440,000 x 15% = 216000 $

NWC at end of year 2 = 1620000 x 15% = 243000 $

Now incremental NWC for year 2 = 243000 - 216000 = 27000$

Increase in NWC = Decrease in cash , hence cash outflow = $27000

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