Question

For project A, the cash flow effect from the change in net working capital is expected to be -900 dollars at time 2 and the level of net working capital is expected to be 1,600 dollars at time 2. What is the level of current assets for project A expected to be at time 1 if the level of current liabilities for project A is expected to be 4,900 dollars at time 1?

Answer 1

Cash flow effects from changes in NWC = -ΔNWC

-900 = -ΔNWC2

So ΔNWC2= 900

Since the cash flow effect from the change in net working capital is expected to be $-900 at time 2, then the change in NWC at time 2 is expected to be $900, which means that NWC is expected to increase by $900 from time 1 to time So,

ΔNWC2= NWC2– NWC1

900 = 1600 - NWC1

So NWC1 = $700

We know that Net working capital = Current assets - Current liabilities

So, 700 = current assets - 4900

=> Current assets at year 1 = $5600