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Homework answers / question archive / Castle View Games would like to invest in a division to develop software for a soon-to-be-released video game console
Castle View Games would like to invest in a division to develop software for a soon-to-be-released video game console. 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): (To copy the table below and use in Excel, click on icon in the upper right corner of table.) Year 1 Year 2 Year 3 Year 4 Year 5 1 10 15 7 19 2 Cash Accounts receivable Inventory Accounts payable 15 25 11 15 25 14 29 26 7 21 23 15 3 6 4 18 23 34 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. (Note: Enter decreases as negative numbers.) The change in working capital for year 1 is $ 14 million. (Round to the nearest integer.) The change in working capital for year 2 is $ 8 million. (Round to the nearest integer.) The change in working capital for year 3 is $3 million. (Round to the nearest integer.)
Answer:
Working capital = current assets – current liabilitites
current assets = cash, accounts receivable and inventory
current liability = Accounts payable
statement showing change in working capital
figures in millions of dollars
| Particulars | year 1 | year 2 | year 3 | year 4 | year 5 |
| Cash (A) | 7 | 10 | 15 | 15 | 15 |
| Account receivable(B) | 19 | 26 | 25 | 25 | 23 |
| Inventory (C) | 6 | 7 | 11 | 14 | 15 |
| Current assets (A + B + C) | 32 | 43 | 51 | 54 | 53 |
| Accounts payable (D) | 18 | 21 | 23 | 29 | 34 |
| Current liabilities (D) | 18 | 21 | 23 | 29 | 34 |
| Ending working capital | 14 | 22 | 28 | 25 | 19 |
| Less: Beginning working capital | 0 | 14 | 22 | 28 | 25 |
| Change in working capital | 14 | 8 | 6 | – 3 | – 6 |
Ending working capital = Current assets – current liabilities
change in working capital = Ending working capital – Beginning working capital
