Question

Sales for year 2 of a new project are expected to increase by 10.00%. For every dollar increase in sales, current assets are expected to increase by 17.20% and current liabilities by 4.40%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.
options: 1.18%
1.22%
1.25%
1.28%
1.31%

Answer 1

Let sales in year 1 be $100

So, when Sales for year 2 of a new project are expected to increase by 10%

Sales in year 2 = 100*(1 + 0.1) = $110

So, dollar increase in sales = sales in year 2 - sales in year 2 = 110 - 100 = $10

For every dollar increase in sales, current assets are expected to increase by 17.20% and current liabilities by 4.40%

So, dollar increase in current asset = dollar increase in sales*(1+increase in current assets) = 10*(1+0.172) = $11.72

Similarly, dollar increase in current liabilities = dollar increase in sales*(1+increase in current liabilities) = 19.5*(1+0.044) = $10.44

So, change in net working capital = Increase in current assets - increase in current liabilities = 11.72 - 10.44 = 1.28

So, change in net working capital as a percentage of year 1 sales = Change in NWC/sales in year 1 = 1.28/100 = 1.28%

Option D is correct.