Question

For project A, the cash flow effect from the change in net working capital is expected to be 300 dollars at time 2 and the level of net working capital is expected to be 1,500 dollars at time 1. What is the level of current liabilities for project A expected to be at time 2 if the level of current assets for project A is expected to be 4,600 dollars at time 2?

Answer 1

In this question, we need to calculate the Current liabilities for Project A at Time 2. Let's solve this step by step:

Step 1: Calculate the Net working capital at Time 2 using Net working Capital at Time 1.

Now, at time 2, all we have is the change in net working capital whose formula is as following:

Change in Net working capital (Time 2) =Net Working Capital (T2) - Net Working Capital (T1)

$300 = Net working Capital (T2) - $1500

$300 + $1500 = Net working Capital (T2)

$1800 = Net Working Capital (T2).

Now, we have the Net working Capital at T2 ie. $1,800

Step 2: Calculate the Current Liabilities from Net working Capital calculated in previous step and Current assets given in the question.

Net working capital = Current Assets - Current Liabilities

$1800 = $4600 - Current Liabilites

Current Liabilites = $4600 - $1800

Current Liabilties = $2800

Level of current liabilites of Project A for T2 are $2,800.

Note: T1 means Time 1 and T2 means Time 2 for the sake of convenience.