Question

Sales for year 2 of a new project are expected to increase by 13.50%. For every dollar increase in sales, current assets are expected to increase by 20.70% and current liabilities by 6.15%. For year 2, calculate the change in net working capital as a percentage of year 1 sales.

a) 1.77%

b) 1.82%

c) 1.87%

d) 1.92%

e) 1.96%

Answer 1

Sales increase for year 2 = 13.50%

Current Assets increase as a percentage of year 1 = Sales increase for year 2 * increase in current assets = 13.50% * 20.70% = 2.7945%

Current liabilities increase as a percentage of year 1 = Sales increase for year 2 * increase in current liabilities = 13.50% * 6.15% = 0.83025%

Change in net working capital as a percentage of year 1 sales = Current Assets increase as a percentage of year 1 - Current liabilities increase as a percentage of year 1

= 2.7945% - 0.83025%

= 1.96425%

Therefore, change in net working capital as a percentage of year 1 sales is 1.96%

Option e is correct