Suppose that HomeNet will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). However, receivables related to HomeNet are expected to account for 15% of annual sales, and payables are expected to be 15% of the annual cost of goods sold (COGS). Fifteen percent of $13 million in sales is $1.95 million and 15% of $5.5 million in COGS is $825,000. HomeNet’s net working capital requirements are shown in the following table:

How does this requirement affect the project’s free cash flow?

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1 Year 2 Net Working Capital Forecast ($000s) 3 Cash Requirements 4 Inventory 5 Receivables (15% of Sales) 6 Payables (15% of COGS) 7 Net Working Capital 0 0 ooooo 0 0 0 0 1 made 0 0 2 0 0 3 0 OC 0 14 0 0 0 1,950 1,950 1,950 1,950 -825 -825 -825 -825 1,125 1,125 1,125 1,125 OOOOO 0 0 0 0