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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• Kingbird Company is negotiating a nine-year lease of equipment with MTBA, Inc. The equipment has a useful life of ten years. Kingbird requires a guarantee that the equipment's residual value will be at least $4,000 at the end of the lease, and MTBA concurs, even though it anticipates the equipment's residual value to be only $2,000 at that time. Assuming the equipment's fair value at the start of the lease is $60,000, and Kingbird seeks a 6% return on the lease, the annual rental payment amount demanded by Kingbird needs to be determined with payments due at the beginning of each year. To calculate the annual rental payment, we would need to calculate the present value of the expected residual value at the end of the lease term and then determine the annual payments that allow Kingbird to recover the rest of the equipment value and earn the desired rate of return over the lease term. Here's the process: 1. Calculate the present value (PV) of the $4,000 guaranteed residual value at the end of the 9-year period, discounted at Kingbird's desired rate of return (6%): PV = FV / (1 + r)^n PV = $4,000 / (1 + 0.06)^9 PV = $4,000 / 1.689479373 PV ≈ $2,367.25 2. Subtract this present value of the residual value from the fair value of the equipment to get the amount that needs to be recovered through the lease payments: Amount to be recovered = Fair value - PV of residual value Amount to be recovered = $60,000 - $2,367.25 Amount to be recovered ≈ $57,632.75 3. Calculate the annual rental payment, taking into account that payments are made at the beginning of each period (i.e., an annuity due). First, we need the annuity due factor for a 6% rate of return over 9 periods: Annuity due factor = [(1 - (1 + r)^-n) / r] * (1 + r) Annuity due factor ≈ 7.523259448 (using an annuity due present value factor table or financial calculator) 4. Finally, divide the amount to be recovered by the annuity due factor to find the annual rental payment: Annual rental payment = Amount to be recovered / Annuity due factor Annual rental payment ≈ $57,632.75 / 7.523259448 Annual rental payment ≈ $7,662.88 Therefore, Kingbird Company should demand an annual rental payment of approximately $7,662.88 from MTBA, Inc. Please note that this is a simplified calculation and in practice, lease accounting can be more complex and may require more comprehensive financial modeling.
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