Question

For project A, the cash flow effect from the change in net working capital is expected to be 100 dollars at time 2, the level of net working capital is expected to be 1,500 dollars at time 0, and the level of net working capital is expected to be 1,200 dollars at time 2. What is the cash flow effect from the change in net working capital expected to be at time 1?

For project A, the change in net working capital is expected to be 1,300 dollars at time 0, the cash flow effect from the change in net working capital is expected to be -1,100 dollars at time 1, and the level of net working capital is expected to be 1,000 dollars at time 2. What is the cash flow effect from the change in net working capital expected to be at time 2?

Answer 1

Part 1 : Given:-

Cash flow effect from the change in net WC at Year 2 = $ 100

Net working capital at Year 0 = $ 1,500

Net working capital at Year 2 = $ 1,200

To Find:- cash flow effect from the change in net working capital expected to be at time 1?

Solution:-

Year	Net Working Capital	Cash flow effect of change in Working capital
0	$1,500.00
1	$1,300.00	$200.00
2	$1,200.00	$100.00

Cash flow effect of year 2 is positive $100, this means that Net working capital has reduced by $100 as compared to year 1.

Thus, Net working capital in Year 1 = Net WC in year 2 + Savings in WC = $1,200 + $ 100 = $1,300

Now,

Cash flow effect of changes in Working capital in Year 1= Net WC in year 0 - Net WC in year 1= $1,500 - $1,300

   Cash flow effect of changes in Working capital in Year 1 = $ 200

Part 2: Given :-

Net working capital in Year 0 = $ 1,300

Cash flow effect from the change in net WC in year 1 = - $1,100

Net working capital in Year 2 = $ 1,000

To Find :- Cash flow effect from the change in net working capital expected to be at Year 2

Year	Net Working Capital	Cash flow effect of change in Working capital
0	$1,300.00
1	$2,400.00	-$1,100.00
2	$1,000.00	$1,400.00

Cash flow effect of year 1 is negative $1,100, this means that Net working capital has increaded by $1,100 as compared to year 0.

Thus, Net working capital in Year 1 = Net WC in year 0 - Savings in WC = $1,300 - ( - $1,100) = $ 2,400

Now,

Cash flow effect of changes in Working capital in Year 2 = Net WC in year 1 - Net WC in year 2 = $2,400 - $1,000

Cash flow effect of changes in Working capital in Year 2 = $ 1,400