Question

Simpson Corporation expects to sell the following number of units of their newest product: Year Unit Sales 1 8,000 2 9,000 3 12,000 4 15,000 The revenue per unit is $180. NWC starts out at $50,000, then rises to 15% of sales. What is the change in cash flow for the NWC balance at the end of year 2

Answer 1

Answer:

$27,000

Explanation:

Years   Units    Selling    Sales       NWC requirement   Δ in Cash flows    

            sales    price$   revenue$      50,000 / 15%          for NWC

  0          -              -               -                    $50,000            $50,000

  1        8000      180      1,440,000            $216,000          $166,000

  2       9000      180      1,620,000            $243,000          $27,000

  3       12000     180      2,160,000            $324,000          $81,000

  4       15000     180      2,700,000           $405,000          $81,000

Note: Cashflow for NWC is derived by Cumulative difference in Cash flows for Present Year and previous year. Hence, the change in cash flow for the NWC balance at the end of year 2 is $27,000