Question

The Sisyphean Corporation is considering investing in a new machine that has an estimated life of three years. The cost of the machine is $50,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The machine will result in sales of 3,000 widgets in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per widget that Sisyphean will charge its customers is $15 and is to remain constant. The widgets 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 Sisyphean Corporation needs to hold 4% of its annual revenues in cash, 9% of its annual revenues in accounts receivable, 11% of its annual revenues in inventory, and 8% of its annual revenues in accounts payable. The firm is in the 23% tax bracket, and has a cost of capital of 6%. What is the required investment in net working capital in the second year of operations?

Answer 1