Question

For project A, the cash flow effect from the change in net working capital is expected to be 700 dollars at time 2 and the level of net working capital is expected to be 2,200 dollars at time 2. What is the level of current liabilities for project A expected to be at time 1 if the level of current assets for project A is expected to be 8,300 dollars at time 1?

Answer 1

Answer : Net working Capital is measured as current assets minus Current Liabilities

Cash Flow effect from change in Net Working Capital is negative of change in Net Working capital

Since the cash  flow effect from the change in net working capital is expected to be 700 dollars at time 2 change in Net working capital is -700. Net working Capital Decline by 700

Change in Net Working capital = Net working Capital at year 2 - Net working Capital at year 1

-700 = 2200 - Net working Capital at year 1

Net working Capital at year 1 = 2200 + 700

=2900

Net working Capital at year 1 = Current assets - Current Liabilities

Current Liabilities = 8300 - Net working Capital at year 1

= 8300 - 2900

= 5400