Question

Sales for year 2 of a new project are expected to increase by 19.50%. For every dollar increase in sales, current assets are expected to increase by 26.70% and current liabilities by 9.15%. 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 19.50%

Sales in year 2 = 100*(1 + 0.195) = $119.50

So, dollar increase in sales = sales in year 2 - sales in year 2 = 119.5 - 100 = $11.5

For every dollar increase in sales, current assets are expected to increase by 26.70% and current liabilities by 9.15%

So, dollar increase in current asset = dollar increase in sales*(1+increase in current assets) = 19.5*(1+0.267) = $24.70

Similarly, dollar increase in current liabilities = dollar increase in sales*(1+increase in current liabilities) = 19.5*(1+0.0915) = $21.28

So, change in net working capital = Increase in current assets - increase in current liabilities = 24.70 - 21.28 = 3.42

So, change in net working capital as a percentage of year 1 sales = Change in NWC/sales in year 1 = 3.42/100 = 3.42%