The GEB Corp is considering investing in a new toy manufacturing machine that ha

Question

The GEB Corp is considering investing in a new toy 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 toy manufacturing machine will result in sales of 2000 toys in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that GEB will charge its customers is $18 each and is to remain constant. The toys 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 GEB Corp 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 35% 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:
A) an increase of $360 B) an increase of $396
C) a decrease of $360 D) a decrease of $396

I feel like the answer is $360. Any idea if this is right?

Explanation / Answer

Assets= cash+accounts receivable+inventory

liabilities= accounts payable+tax+capex

working capital = assets-liabilities

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