Question

For project A, the cash flow effect from the change in net working capital is expected to be -1,100 dollars at time 2, the level of net working capital is expected to be 1,000 dollars at time 0, and the level of net working capital is expected to be 1,100 dollars at time 2. What is the cash flow effect from the change in net working capital expected to be at time 1?

Answer 1

The cash flow effect from the change in net working capital is expected to be -1,100 dollars at time 2

Net working capital in year 0 = 1,000

Net working capital in year 2 = 1,100

A negative effect implies an increase in networking capital from year 1 to year 2 by 1,100

Net working capital in year 2 - Net working capital in year 1 = 1,100

1,100 - Net working capital in year 1 = 1,100

Net working capital in year 1 = 0

Change in net working capital from year 0 to year 1 = 0 - 1,000 = -1,000

A decrease in change in net working capital has a positive effect.

The effect of net working capital in year 1 = +1,000