Final answer:
The change in cash flows due to working capital for year 2 will be 1.1% of sales since current assets are increasing by 17% and accounts payable by 6% for every dollar increase in sales, resulting in a net increase of 11% of the 10% sales increase. option a.
Step-by-step explanation:
The question asks about the change in cash flows due to working capital in the second year, given certain percentages of increase in sales, current assets, and accounts payable. To find this change, one must calculate the net increase in working capital required for the increased level of sales. We know that sales are expected to increase by 10%, current assets are expected to increase by 17% for every dollar increase in sales, and accounts payable are expected to increase by 6% for every dollar increase in sales. Therefore, the change in working capital is 17% - 6%, which equals 11% of the sales increase. Since sales increased by 10%, the change in working capital due to these changes is 11% of this 10% increase.
The correct answer is that the change in cash flows due to working capital will be 1.1% of sales, thus option (d) 1.1% of sales is the correct choice.