Question

Suppose Linksys is considering the development of wireless home networking appliance, called HomeNet, that will provide both the hardware and software necessary to run an entire home from an internet connection. Linksys receivales are 15.4% of sales and its payables are 14.5% of COGS. Forecast the required investment in networking capital for HOMENet assuming that sales of and cost of goods sold (COGS) will be as follows:

Year 0 1 2 3 4

Sales $23720 $26637 $23583 $8384

COGS $ 9589 89$10768 $ 9534 $3389

Required free cash flows from earnings.

Answer 1

Answer :

Cash Flow from Earnings = Sales - COGS - Increase in Net Working Capital

Year	0	1	2	3	4
Sales		23720	26637	23583	8384
COGS		9589	10768	9534	3389
Investment in Receivables i.e 15.4% of sales	0	3652.88	4102.098	3631.782	1291.136
Investment in Paybles i.e 14.5% of COGS	0	1390.405	1561.36	1382.43	491.405
Net Working Capital (Receivables - Payables)	0	2262.475	2540.738	2249.352	799.731
Increase in Net Working Capital		2262.475	278.263	-291.386	-1449.621

Cash Flow from Earnings in year 1 = 23720 - 9589 - 2262.475

= 11868.525

Cash Flow from Earnings in year 2 = 26637 - 10768 - 278.263

= 15590.737

Cash Flow from Earnings in year 3 = 23583 - 9534 - (-291.386)

= 14340.386

Cash Flow from Earnings in year 4 = 8384 - 3389 - (-1449.621)

= 6444.621