Question

Sales for year 2 of a new project are expected to increase by 14.00%. For every dollar increase in sales, current assets are expected to increase by 21.20% and current liabilities by 6.40%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.

Question 3 options:

	1.97%
	2.02%
	2.07%
	2.12%
	2.18%

Answer 1

Let sales in year 1 be $100

So, when Sales for year 2 of a new project are expected to increase by 14.00%

Sales in year 2 = 100*(1 + 0.14) = $114

So, dollar increase in sales = sales in year 2 - sales in year 2 = 114 - 100 = $14

For every dollar increase in sales, current assets are expected to increase by 21.20% and current liabilities by 6.40%

So, dollar increase in current asset = dollar increase in sales*(1+increase in current assets) = 14*(1+0.2120) = $16.97

Similarly, dollar increase in current liabilities = dollar increase in sales*(1+increase in current liabilities) = 14*(1+0.064) = $14.90

So, change in net working capital = Increase in current assets - increase in current liabilities = 16.97 - 14.90 = $2.07

So, change in net working capital as a percentage of year 1 sales = Change in NWC/sales in year 1 = 2.07/100 = 2.07%

Option C is correct.