uating a project for The Tiff-any golf club, guaranteed to correct that nasty sl

Question

uating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff- to be $480 per unit and sales volume to be 1,000 units in year 1:900 units in year 2, and 1,325 units in year 3. The project has a ble costs amount to $265 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $189,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets end of year 3 is expected to be $43,000. NWC requirements at the beginning of each year will be approximately 30 percent of the proj ected sales during the coming year. The tax rate is 30 percent and the required return on the project is 12 percent. What change in NWC occurs at the end of year 1? (Enter a decrease as a negative amount using a minus sign.)

Explanation / Answer

Net working capital required at the beginning of year 1

= Projected sales for year 1 * 30%

= (Units expected to be sold in year 1 * Sale price per unit ) * 30%

= (1000 * 480 ) * 30%

= $480000 * 30%

= $144000

Now NWC required for year 2 beginning that is year 1 end

= Projected sales for year 2 * 30%

= (Units expected to be sold in year 2 * Sale price per unit ) * 30%

= (900 * 480 ) * 30%

= $432000 * 30%

= $129600

Therefore at the end of year 1, NWC decreases by ($144000 - $ 129600 )

Therefore change in NWC = -$14400

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