Jim Inc plans a project that will generate revenues of 10 mi

Jim Inc plans a project that will generate revenues of $10 million. The COGS are expected to be 60% of revenue. The firm offers 90 days credit to its customers and in turn gets 180 days credit from its suppliers. The firm follows just in time inventory policy and hence only uses 5 days of inventory in its operations. Calculate the amount of NWC the firm will need?

Solution

Net Sale = $10 million

COGS = 60% of sale

            = $6 million

Credit term for customer = 90 days.

So value of account receivables = $10 million × 90 days / 360 days

                                                    = $2.5 million

Value of account receivables is $2.5 million

Again

Payment to supplier = 180 days

So value of account Payables = $6 million × 180 days / 360 days

                                                = $3 million

Value of account payables is $3 million

Again

Inventory days = 5 days

So value of Inventory = $6 million × 5 days / 360 days

                                    = $83,333.33

Value of current assets = $2,500,000 + $83,333.33

                                      = $2,583,333.33

Value of current assets is $$2,583,333.33

Value of current liability = 3 million

Net working capital is calculated below using following formula:

NWC = Current assets – Current liability

          = $2,583,333.33 - $3,000,000

          = -$416,666.67

Hence, value of net working capital is -$416,666.67