Question

A project will require $511,800 for manufacturing equipment. The equipment is classified as five-year property for MACRS. The project has a three-year life. At the end of the project, the equipment will be worth about 20 percent of what we paid for it. We will have to invest $47,000 in net working capital at the start. After that, net working capital requirements will be 10 percent of sales. All additional investments in net working capital will be recovered at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent. What is the change in net working capital in Year 1?

$54,200

$47,000

$78,300

$96,500

$49,500

Answer 1

Net Working Capital Investment in year 0 = $47,000

Net Working Capital Required in Year 1 = Sales in Year 2 * 10%

= $965,000 * 10%

= $96,500

Change in net working capital in year 1 = Net working capital required in year 1 - Net working capital investment in year 0

= $96,500 - $47,000

= $49,500

Therefore, change in net working capital in year 1 is $49,500