NWC = net working capital, is defined as the amount of capital needed on hand to cover short term debt. The question says that NWC is approx 10% of projected sales. Year 1 projected sales are to be 1000*375 = 375,000 so NWC would be 10% of that or 37,500. Year 2 projected sales are to be 1400 * 375 = 525,000 so NWC would be 52,500. Find the difference between year 2 and year 1 52500-37500 = $15000
Question 2:
Is hard to explain but http://accountingexplained.com/manageria... can show you better than I can explain it. They show a very good example, if you follow the formulas and tables, substituting the given values from your question you will get 2.77 years.
The questions and answers were given to my by my professor, but I am confused as to how he solved them.
You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $375 per unit and sales volume to be 1000 units in year 1; 1400 units in year 2; and 1325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
$25,000
→
$15,000
$10,000
$17,500
Step 1: Change in sales = 150,000; Increase in NWC = 150,000 * .1 = $15,000
(HOW DO YOU SOLVE THIS PROBLEM? PLEASE BE VERY SPECIFIC?)
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are 3 and 3.5 years, respectively.
Use the discounted payback decision rule to evaluate this
Answer:2.77
