Company A estimates that it needs 30% of sales in net working capital. In year 1, sales were $1 million and in year 2, sales were $2 million. Associated with the change in net working capital from year 1 to year 2 is a cash: (A) inflow of $300,000. (B) outflow of $300,000. (C) inflow of $600,000. (D) outflow of $600,000.

Question

Business

Sheldon Wong

21 May, 17:09

Company A estimates that it needs 30% of sales in net working capital. In year 1, sales were $1 million and in year 2, sales were $2 million. Associated with the change in net working capital from year 1 to year 2 is a cash: (A) inflow of $300,000. (B) outflow of $300,000. (C) inflow of $600,000. (D) outflow of $600,000.

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Adrianna · Answer 1

(B) outflow of $300,000

Explanation:

The change in net working capital of the Company A shall be determined through the following mentioned equation:

Change in net working capital=Percentage of sales in year 2-Percentage of sales in year 1

Change in net working capital=0.30*$2,000,000-0.30*$1,000,000

=$300,000 out flow

So based on the above calculations, the answer shall be (B) outflow of $300,000