Question

Sales for year 2 of a new project are expected to increase by 11.50%. For every dollar increase in sales, current assets are expected to increase by 18.70% and current liabilities by 5.15%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.

Answer 1

Let sales in year 1 be $100

So, when Sales for year 2 of a new project are expected to increase by 11.50%

Sales in year 2 = 100*(1 + 0.115) = $111.50

So, dollar increase in sales = sales in year 2 - sales in year 2 = 111.5 - 100 = $11.5

For every dollar increase in sales, current assets are expected to increase by 18.70% and current liabilities by 5.15%

So, dollar increase in current asset = dollar increase in sales*(1+increase in current assets) = 11.5*(1+0.187) = $13.65

Similarly, dollar increase in current liabilities = dollar increase in sales*(1+increase in current liabilities) = 11.5*(1+0.0515) = $12.09

So, change in net working capital = Increase in current assets - increase in current liabilities = 13.65 - 12.09 = 1.56

So, change in net working capital as a percentage of year 1 sales = Change in NWC/sales in year 1 = 1.56/100 = 1.56%