Question

Sales for year 2 of a new project are expected to increase by 16.50%. For every dollar increase in sales, current assets are expected to increase by 23.70% and current liabilities by 7.65%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.

Question 5 options:

	2.65%
	2.71%
	2.78%
	2.85%
	2.91%

Answer 1

Let sales in year 1 be $100

So, when Sales for year 2 of a new project are expected to increase by 16.5%

Sales in year 2 = 100*(1 + 0.165) = $116.50

So, dollar increase in sales = sales in year 2 - sales in year 2 = 116.50 - 100 = $16.50

For every dollar increase in sales, current assets are expected to increase by 23.70% and current liabilities by 7.65%

So, dollar increase in current asset = dollar increase in sales*(1+increase in current assets) = 16.5*(1+0.237) = $20.41

Similarly, dollar increase in current liabilities = dollar increase in sales*(1+increase in current liabilities) = 16.5*(1+0.0765) = $17.76

So, change in net working capital = Increase in current assets - increase in current liabilities = 20.41 - 17.76 = 2.65

So, change in net working capital as a percentage of year 1 sales = Change in NWC/sales in year 1 = 2.65/100 = 2.65%

Option A is correct.