Use the information for the question(s) below.
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 2000 canes in year 1. Sales are estimated to grow by 10% per year for
each of the three years. 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, 4% of its
annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The
firm is in the 30% tax bracket and has a cost of capital of 10%.
-The change in net working capital from year 1 to year 2 is closest to:

Question

Quizplus · Accepted Answer

The correct answer is A. The change in net working capital from year 1 to year 2 is closest to an increase of $360. This is because the increase in sales from year 1 to year 2 is 10%, which means that the increase in net working capital will be 10% of the net working capital in year 1. The net working capital in year 1 is $3,600, so the increase in net working capital from year 1 to year 2 will be $360.

Use the Information for the Question(s) Below