Question

The Card Shoppe needs to maintain 21 percent of its sales in net working capital. Currently, the store is considering a four-year project that will increase sales from its current level of $349,000 in year 0 to $408,000 in year 1 and to $414,000 per year for the following three years of the project. What amount should be included in the project analysis when you calculate the cash flow for net working capital in year 4 of the project? *

a. −$1,260

b. $1,260

c. $13,650

d. -$13,650

Answer 1

Solution :

As per the information given in the question the Card Shoppe needs to maintain 21 percent of its sales in net working capital

Thus amount that should be included in the project analysis when we calculate the cash flow for net working capital in final year “4” of the project is

Cash flow for net working capital in Year “ 4 “ = ( Sales at Year ‘ 4 ‘ – Sales at Year ‘ 0 ‘ ) * percentage of sales

We know that

Sales at Year ‘ 4 ‘ = $ 414,000 ; Sales at Year ‘ 0 ‘ = $ 349,000   ; percentage of sales = 21 % = 0.21   ;

Applying the above information we have Cash flow for net working capital in Year “ 4 “ as

= ( $ 414,000 - $ 349,000 ) * 0.21

= $ 65,000 * 0.21

= $ 13,650

Thus the amount that should be included in the project analysis when we calculate the cash flow for net working capital in final year “4” of the project is = $ 13,650

The solution is option c. $ 13,650