Lottie's Boutique needs to maintain 20% of its sales in net working capital. Lottie's is considering a 3-year project which will increase sales from their current level of $110,000 to $130,000 the ﬁrst
Year and $145,000 a year for the following two years. What amount should be included in the
Project analysis for the last year of the project in regards to the net working capital?

Question

Quizplus · Accepted Answer

To calculate the net working capital required for the last year of the project, we need to first calculate the current level of net working capital (20% of sales) and then add the incremental net working capital required for the project.

Current level of net working capital = 20% of $110,000 = $22,000

Incremental net working capital required for the project = 20% of $145,000 = $29,000

Therefore, the total net working capital required in the last year of the project = $22,000 + $29,000 = $51,000

However, this is the gross amount of net working capital required. Since the project will generate additional sales and profits in the last year, we can expect some of the net working capital to be released. Assuming that the net working capital will be released at the same rate as the sales, we can estimate the net working capital required in the last year as follows:

Net working capital required in the last year = $51,000 - 20% of ($145,000 - $110,000) = $51,000 - $7,000 = $44,000

Therefore, the amount that should be included in the project analysis for the last year of the project in regards to the net working capital is $7,000 (Option D).

Lottie's Boutique Needs to Maintain 20% of Its Sales in Net