Question: Wilson Electric Company a manufacturer of various types of electrical equipment is examining its working capital investment policy for next year. Projected fixed assets and current liabilities are $20 million and $18 million, respectively. Sales and EBIT are partially a function of the company’s investment in working capital particularly its investment in inventories and receivables. Wilson is considering the following three different working capital investment policies:
Investment in
Current
Working capital Assets (in Projected Sales EBIT
Investment Millions (in Millions (in Millions
Policy of Dollars) of Dollar) of Dollars)
|
Aggressive (small investment in current assets)
|
$28
|
$59
|
$5.9
|
|
Moderate (moderate investment in current assets)
|
$30
|
$60
|
$6.0
|
|
Conservative (large investment in current assets)
|
$32
|
$61
|
$6.1
|
Determine the following for each of the working capital investment policies:
- Rate of return on total assets (that is, EBIT/ total assets).
- Net working capital position.
- Current ratio.