Castle View Games would like to invest in a division to develop software for vid

Question

Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates (in millions of dollars)

Net working capital:

year 1: 14

year 2: 19

year 3: 25

year 4: 26

year 5: 22

Assuming that Castle View currently does not have any working capital invested in
this division, calculate the cash flows associated with changes in working capital for
the first five years of this investment

Could you tell me the change in working capital not the increase in working capital?

1 Year 1 2 3 4 5 2 Cash 6 12 15 15 15 3 Accounts Receivable 21 22 24 24 24 4 Inventory 5 7 10 12 13 5 Accounts Payable 18 22 24 25 30

Explanation / Answer

Net Working capital in Year 1= Cash +A/c receivables + Inventory - Account Payables = 6+21+5-18 = 14

NWC in Year 2= 12+22+7- 22 =19

NWC in Year 3 = 25

NWC in Year 4= 26

NWC in Year 5 =22

Change in NWC in Year 1 = 14-0 =14

Change in NWC in Year 2 = 19-14 =5

Change in NWC in Year 3 = 25-19 =6

Change in NWC in Year 4 = 26-25=1

Change in NWC in Year 5 = 22-26 = -4

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