Question

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

Answer 1

Answer:

Sales = $450 million

Fixed assets = $225 million

Fixed assets/Sales ratio = 50%

At 100% Capacity

Fixed assets = 100/65 x $225 million = $346.15 million

The amount of cash generated from the sale of fixed assets at book value is $346.15 million.

Explanation:

The amount of cash generated from the the sale of fixed assets at book value equals 100/65 of the original book value. The original book value was calculated based on 65% capacity. Since the company is now operating at full capacity (100%), the book value becomes 100/65 of the original book value.