Based on the following information, compute the change in net working capital for year 1. Assume the discount rate is 10% for everything and the tax rate is 40%. HalfFull Enterprises is a producer and distributor of pre-packaged ice, headquartered in Quebec, Canada. Global warming is transforming the retail ice industry. You are consulting for Ms. Leau DeGlace, heir to the DeGlace ice dynasty and successor to Franois DeGlace, the charismatic founder, former CEO, and general personification of the company. Optimistic investors liked to say: DeGlace is HalfFull. In an effort to reinvigorate company sales, the younger DeGlace intends to branch out into a new product line: very high-end, incredibly insulated (and expensive) ice chests, sold under the brand name Sasquatch. Unwilling to move at a glacial pace, Ms. DeGlace has already invested $15 million in research and development, with another $1 million annually committed in contracts for renting a production facility. The Sasquatch coolers are premium, highly technical products. Although they will be priced at $525 per unit retail, consumers will need to use far less ice in them. Indeed, the company estimates that for every Sasquatch sold, the company will lose about $10 in net retail ice sales per year in perpetuity. Starting with the first year of production, the company expects to sell 15,000 units per year. Production costs are 30% of sales plus fixed operating costs of $1 million (in addition to the rent). To manufacture the Sasquatch will require a capital expenditure of 8 million (depreciated straight line to zero over a four year accounting life), in addition to the expenditures on research and development and the rental contract mentioned above. The company is willing to project the project out 4 years, at which point they expect to liquidate the assets at their book value. The company will require a lot of net working capital, mostly in the form of inventory. The company will start with half a million in net working capital, and then move to 10% of sales. Based on the following information, compute the change in net working capital for year 1. Assume the discount rate is 10% for everything and the tax rate is 40%. HalfFull Enterprises is a producer and distributor of pre-packaged ice, headquartered in Quebec, Canada. Global warming is transforming the retail ice industry. You are consulting for Ms. Leau DeGlace, heir to the DeGlace ice dynasty and successor to Franois DeGlace, the charismatic founder, former CEO, and general personification of the company. Optimistic investors liked to say: DeGlace is HalfFull. In an effort to reinvigorate company sales, the younger DeGlace intends to branch out into a new product line: very high-end, incredibly insulated (and expensive) ice chests, sold under the brand name Sasquatch. Unwilling to move at a glacial pace, Ms. DeGlace has already invested $15 million in research and development, with another $1 million annually committed in contracts for renting a production facility. The Sasquatch coolers are premium, highly technical products. Although they will be priced at $525 per unit retail, consumers will need to use far less ice in them. Indeed, the company estimates that for every Sasquatch sold, the company will lose about $10 in net retail ice sales per year in perpetuity. Starting with the first year of production, the company expects to sell 15,000 units per year. Production costs are 30% of sales plus fixed operating costs of $1 million (in addition to the rent). To manufacture the Sasquatch will require a capital expenditure of 8 million (depreciated straight line to zero over a four year accounting life), in addition to the expenditures on research and development and the rental contract mentioned above. The company is willing to project the project out 4 years, at which point they expect to liquidate the assets at their book value. The company will require a lot of net working capital, mostly in the form of inventory. The company will start with half a million in net working capital, and then move to 10% of sales
