Joel's Shop needs to maintain 15% of its sales in net working capital. Joel's is considering a 4-year project which will increase sales from their current level of $130,000 to $150,000 the first year and to $165,000 a year for the following three years. What amount should be included in the project analysis for net working capital in year four of the project?

Question

Quizplus · Accepted Answer

The net working capital needed for the project in year four is based on the sales of that year, which are $165,000. 15% of $165,000 is $24,750. However, the question asks for the amount to be included in the project analysis for year four specifically, which means we need to consider the change from the previous year. The sales in the third year are also $165,000, so the net working capital requirement would not change between the third and fourth years. Therefore, the amount to be included for the change in net working capital in year four is $0. However, since the question specifically asks for the amount in year four, and considering the net working capital is based on the sales of that year, the correct interpretation would be to calculate the net working capital based on the sales of year four without considering the change from the previous year. This was an error in my initial explanation. The correct answer should reflect the net working capital requirement for the sales in year four, which is indeed 15% of $165,000, equating to $24,750. This oversight in the explanation led to confusion, and the accurate answer reflecting the net working capital for year four's sales is indeed $24,750, aligning with the project's requirements for maintaining 15% of its sales in net working capital.

Joel's Shop Needs to Maintain 15% of Its Sales in Net