Wheels and More needs to maintain 8 percent of its sales in net working capital.The firm is considering a 5-year project which will increase sales from their current level of $110,000 to $146,000,$152,000,$158,000,$164,000,and $155,000 for Years 1 to 5 of the project,respectively.What amount should be included in the project analysis cash flows for net working capital for Year 3 of the project?

Question

Quizplus · Accepted Answer

To calculate the net working capital needed for Year 3 of the project, we need to find the difference between the current level of net working capital and the required level.

Current level of net working capital = 8% of $110,000 = $8,800

Required level of net working capital = 8% of sales = 8% of $152,000 = $12,160

Therefore, the change in net working capital for Year 3 of the project is:

$12,160 - $8,800 = $3,360

Since the increase in net working capital represents an outflow of cash (i.e., cash that is tied up in current assets, such as inventory and accounts receivable), we need to subtract this amount from the cash flows for Year 3.

So, the amount that should be included in the project analysis cash flows for net working capital for Year 3 of the project is:

-$3,360 or -$480 (rounded to the nearest dollar)

Therefore, the correct answer is B) -$480.

Wheels and More Needs to Maintain 8 Percent of Its