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The project requires a level of net working capital in the amount equal to 12% of...

The project requires a level of net working capital in the amount equal to 12% of the next year’s sales. Any increase in NWC is a negative cash flow, and any decrease is a positive cash flow. This project has a 4-year operating life, so any NWC expenditures will be recovered in Year 4. (That is, accounts receivables are received and inventories are drawn down.)

Year 0

Year 1

Year 2

Year 3

Year 4

Sales

$250,000

$257,500

$265,225

$273,188

NWC (12% of sales)

$30,000

$30,900

$31,827

$32,783

$0

CF due to NWC

($30,000)

($900)

($927)

($956)

$32,783

Why NWC at year 0 is 30000$ and at year 4 is 0$?

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Answer #1

匕 al to 2a = 121.ax sala op year 2 12-1. x 265225-3182 12-1x5 10 ご 15It is stated in the given que that the level of net working capital in the amount equal to 12% of the next year's sales,

Hence NWC at year 0 = 12% of the 250000 =$30000

and as the project has operating life of 4 years only thus NWC of year 4 is ZERO (year 5 has no sales from thus project)

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