Net Working Capital for 2012

1. What is the Net Working Capital for 2012? 

2. What is it for 2011? 

3. What is the Change in Net Working Capital (NWC)? 

4. Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372, what is the Cash Flow from Assets? 

Solution 

Net working capital = current assets – current liabilities 

For 2012 = 8752 – 6862 = 1890 

For 2011 = 10083 – 6486 = 3597 

Change in networking capital = -1331 -376 = -1707 

Cash flow from Assets = operating cash flows – capital spending – Additions to NWC 

OCF =7,155 

NCS = 2,372 

Additions to NWC =NWC 2012 –NWC 2011 =1890 -3597 =-1707 

Net Cash Flows from Assets = 7155 – 2372 + 1707 

= 6490 

Part B 

Assume that you are 23 years old and that you place $3,000 year-end deposits each year into a stock index fund that earns an average of 9.5% per year for the next 17 years. 

1. How much money will be in the account at the end of 17 years? 

2. How much money will you have in the account 15 years later at age 55 if the account continues to earn 9.5% per year but you discontinued making new contributions? 

3. How much money would you have at the end of 17 years if you had made the same number of deposits but at the beginning of the year instead of at the end of the year? 

4. How much money will you have in the account 15 years later at age 55 if the account continues to earn 9.5% per year but you discontinued making new contributions? 

Solution 

Fixed periodic payments = $3000 

Interest rate = 9.5% 

Number of compounding periods =17 

FV of ordinary annuity = R X  

= 3000 X  

= 3000 x 38.714 

=116,142 

At fifty five PV= 116,142 

Interest = 9.5 

Years = 15 

FV = 116,142 (1+0.095) 15 

= 116,142 X 3.901 

= 453,069.942 

FV of annuity due = R X  x (1 +i) 

= 3000 X  x (1 +0.095) 

= 3000 x 38.714 x1.095 

=127,173.85 

At fifty five PV= 127,173.85 

Interest = 9.5 

Years = 15 

FV = 127,173.85 (1+0.095) 15 

= 127,173.85 X 3.901 

= 496,105.19 

Part C 

a) The possible range for a correlation coefficient is -1<=r<=1. There are three different scenarios an r value that is closer to 1 shows positive correlation. In case the r value is near -1 then the correlation is negative. If the value is 0, then there is no correlation. 

For purposes of diversification investors prefer correlation coefficient that are close to -1 for diversified portfolio whereby there is an inverse relationship between the various options in that where security X rise by an amount equivalent to a, security Y declines with a similar amount. In this case, investors reduce the loss from one investment from the gains in the other. 

a) Investment rules identified in the text 

If an investor has two investments with identical projected returns but diverse risk stages, investments with lower risks would be preferred 

If there are two investments with similar risk stages but different anticipated returns, the investment likely to have higher returns would be selected. 

Explain the validity of the following statement and provide one (1) supporting fact to justify your reasoning. "Investors do not like risk and will always choose the investment with the least risk." 

Investors make investments to maximise their wealth. They are looking for options that increase their overall wealth. Few investors would invest in projects that have high risks but would prefer options that provide growth into the foreseeable future. Any investment decision requires that the investor does a risk return analysis to determine the viability of an investment. Risky investments with low returns are likely to have fewer investors compared to high risk high return project. An investor prefers to invest their money in projects they are certain or are likely to receive back their invested cash plus some returns.