Question

Sales for year 2 of a new project are expected to increase by 14.50%. For every dollar increase in sales, current assets are expected to increase by 22.70% and current liabilities by 7.15%. For year 2, what is the absolute value of the change in cash as a result of the changes in current assets and current liabilities if the sales in year 1 are $1,000?

Answer 1

The difference between current assets and current liabilities is the working capital. Here, we see that this change in working capital signifies the change in cash in the firm. Hence, we see that a 14.5% increase in sales means $145 increase in sales which means increase in current assets will be = 145 x 0.227 = $32.915 and an increase in current liabilities of = 145 x 0.0715 = $10.3675. Hence, there is a net increase in working capital of = 32.915 - 10.3675 = $22.5475. Hence, this is the net change in cash.