Question

Sales for year 2 of a new project are expected to increase by 13.50%. For every dollar increase in sales, current assets are expected to increase by 20.70% and current liabilities by 6.15%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.

Question 2 options:

	1.77%
	1.82%
	1.87%
	1.92%
	1.96%

Answer 1

Let sales in year 1 be $100

So, when Sales for year 2 of a new project are expected to increase by 13.5%

Sales in year 2 = 100*(1 + 0.135) = $113.50

So, dollar increase in sales = sales in year 2 - sales in year 2 = 113.50 - 100 = $13.50

For every dollar increase in sales, current assets are expected to increase by 20.70% and current liabilities by 6.15%

So, dollar increase in current asset = dollar increase in sales*(1+increase in current assets) = 13.5*(1+0.207) = $16.29

Similarly, dollar increase in current liabilities = dollar increase in sales*(1+increase in current liabilities) = 13.5*(1+0.0615) = $14.33

So, change in net working capital = Increase in current assets - increase in current liabilities = 16.29 - 14.33 = 1.96

So, change in net working capital as a percentage of year 1 sales = Change in NWC/sales in year 1 = 1.96/100 = 1.96%

Option E is correct.