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 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $15 each and is to remain constant. The canes have a cost per unit to manufacture of $8 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 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 8%.

The change in net working capital from year 1 to year 2 is closest to ________.

Group of answer choices

an increase of $356

an increase of $389

a decrease of $356

a decrease of $389

Answer 1

Working capital = Current Assets - Current Liabilities
=cash + accounts receivables + inventory - accounts payable
Change in working capital = Working capital this year - working capital last year
	Year 1	Year 2	Year 3
Sales	36000	39240	42771.6
Cash	1080	1177.2	1283.148
Accounts receivables	1800	1962	2138.58
Inventory	3240	3531.6	3849.444
Accounts payable	2160	2354.4	2566.296
Working Capital	3960	4316.4	4704.876
Change in working capital	3960	356.4	388.476
Hence, change in working capital from Year 1 to 2 is $356.4
i.e. an increase of $356