Question

The following table contains financial forecasts as well as current (period 0) working capital levels for The Greek Connection company.

($000)	0	1	2	3	4	5
Net Income		5	8	10	50	32
Depreciation		2	3	3	4	5
Capital Expenditures		10	10	1	0	0
Levels of Working Capital
Accounts Receivable	6	6	4	7	15	10
Inventory	2	2	4	10	8	4
Accounts Payable	2	4	4	3	2	2

For period 3, compute the level of NWC, change of NWC and change of cash (no decimals, round to $000).

Level net working capital ____________

Change in net working capital __________

Change in cash ____________

Answer 1

For period 3:

i) Level of net working capital( NWC )= Account receivable + Inventory - Account payable

Level of NWC = 7 + 10 - 3 = 14

ii) Change in net working capital (NWC) = Difference of NWC between year 3 & year 0

NWC for period 0 = Account recievables + Inventory - Account payables

NWC for period 0 = 6 + 2 - 2 = 6

Now,  

Change in NWC = 14 - 6 = 8

iii) Cash at year 3 = Net income + Depriciation - Capital expenditure = 10 + 3 - 1 = 12

Change in cash = Cash at year 3 +/- Change in NWC

Change in cash = 12 + 8 = 20

Note : 1) It is assumed that net income is cash balance only.

2) Change in NWC is increasing in year 3 which indicates cash not paid and added to cash.