Suppose that the managers of the router division of Cisco Systems are considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection.
Cisco's receivables are 15.4% of sales and its payables are 14.5% of COGS. Forecast the required investment in net working capital for HomeNet assuming that sales and cost of goods sold (COGS) will be as follows:Year
0
1
2
3
4





Sales
$0
$23,263
$26,283
$23,996
$8,656

COGS
$0
$9,288
$10,744
$9,459
$3,536
The required investment in net working capital for year 0 is What

To forecast the required investment in net working capital (NWC) for the HomeNet project, we need to calculate accounts receivable (based on a percentage of sales) and accounts payable (based on a percentage of COGS). Then, we compute NWC as the difference between accounts receivable and accounts payable.

Given:
- Receivables are 15.4% of sales.
- Payables are 14.5% of COGS.

The formula to calculate NWC for each year is:
\[
\text{NWC} = \text{Receivables} - \text{Payables}
\]
where:
\[
\text{Receivables} = \text{Sales} \times 0.154
\]
\[
\text{Payables} = \text{COGS} \times 0.145
\]

Since sales and COGS in **Year 0** are both $0, the investment in net working capital for Year 0 is also $0.

Would you like me to calculate the required investment in NWC for Years 1 through 4? 

---

Here are five follow-up questions you may find useful:
1. How does a change in the percentage of receivables affect the NWC requirements?
2. What would happen to NWC if COGS were to increase significantly in later years?
3. How would an increase in payable days impact the NWC requirement?
4. What role does NWC play in determining project cash flows?
5. How does NWC affect the overall valuation of a project?

**Tip:** NWC is crucial for understanding a project’s liquidity needs and impacts cash flow estimates.

Suppose that the managers of the router division of Cisco Systems are considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection.

Cisco's receivables are 15.4% of sales and its payables are 14.5% of COGS. Forecast the required investment in net working capital for HomeNet assuming that sales and cost of goods sold (COGS) will be as follows:

Year
0
1
2
3
4

Sales
$0
$23,263
$26,283
$23,996
$8,656

COGS
$0
$9,288
$10,744
$9,459
$3,536

The required investment in net working capital for year 0 is What

Learn how to forecast the required investment in net working capital for Cisco's HomeNet project by calculating receivables and payables based on sales and COGS percentages. This exercise explores key financial concepts in working capital forecasting, suitable for finance and accounting students.

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