Question

Sales for year 2 of a new project are expected to increase by 14.00%. For every dollar increase in sales, current assets are expected to increase by 21.20% and current liabilities by 6.40%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.

Answer 1

Lets take sales in year 1 as 100 units;

ON year 2; sales= 100*(1+14%) =114;

As given for every unit increase in sales; current asset increase by 21.2%

Increase in sales=14 units; increase in current asset= 14*21.2% =2.968 units

As given for every unit increase in sales; current liability increase by 6.4%

Increase in sales=14 units; increase in current asset= 14*6.4% =.896 units;

Total change in working capital= current asset- current liability= 2.968-.896=2.072

net change in WC as percentage of Year 1 sales= 2.072/100 =2.072%