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Project Evaluation

This document discusses working capital needs for businesses. It provides examples of how working capital needs are calculated for two example businesses, and how factors like inventory levels, accounts receivable, accounts payable, and credit terms impact working capital needs. A key point is that working capital needs increase with higher inventory and accounts receivable, and decrease with higher accounts payable from longer supplier payment terms. Formulas are provided showing how working capital is calculated by accounting for inventory, receivables, and payables.

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15 views

Project Evaluation

This document discusses working capital needs for businesses. It provides examples of how working capital needs are calculated for two example businesses, and how factors like inventory levels, accounts receivable, accounts payable, and credit terms impact working capital needs. A key point is that working capital needs increase with higher inventory and accounts receivable, and decrease with higher accounts payable from longer supplier payment terms. Formulas are provided showing how working capital is calculated by accounting for inventory, receivables, and payables.

Uploaded by

rfg sa
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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EiT—M Planning & economic evaluation of

transportation projects

Planning & Economic Evaluation of Transportation Projects

Project evaluation – supplemental notes

Ashenafi Aregawi (PhD): Planning & economic of transportation projects Project Evaluation: 0
Planning & economic evaluation of transportation projects

Working Capital needs

The amount of finance a business needed to carry out its day to

day trading activities is referred to as working capital needs

 Varies from industry to industry depending on the amount of time the business

takes to pay suppliers, the amount of inventory held, and the time takes to

collect cash from customers


Planning & economic evaluation of transportation projects

Working Capital needs

Consider two businesses as an example

 Business 1:

 Buys goods for cash at a cost of 100; holds no inventory and


immediately sells the goods for 250

 Profit = 150

 Assuming all transactions take place at the same time, the


business starts off with zero cash in the bank

 Receives 250 from the customer; pays 100 to the supplier and ends
with 150 cash in the bank

 What is the working capital need of Business 1?


Planning & economic evaluation of transportation projects

Working Capital needs

Consider two businesses as an example

 Business 2:

 Buys goods for cash; holds 500 as inventory for 30 days and sells to the
customer on 60 day credit terms (i.e. it has to wait for 60 days before
receiving cash from the customer)

 Business must immediately pay 500 to the supplier for the


inventory which is held for 30 days

 The business which started with zero in the bank account had to find the
finance to fund the inventory

 What is the working capital need of Business 2?


Planning & economic evaluation of transportation projects

Working Capital needs

Consider two businesses as an example

 Business 2:

 After 30 days it sells goods costing 100 to a customer from 250, its
inventory falls to 400

 It must wait 60 days to receive the 250 from the customer

 What is the working capital needs now?

 Inventory + amount due from the customer (Accounts


receivable) = 400 + 250 = 650
Planning & economic evaluation of transportation projects

Working Capital needs

Consider two businesses as an example

 Business 2:

 In the previous example we assumes that the Business had to pay cash to

its suppliers

 However, if the supplier gave 45 day credit terms for the first 45 days

the business would not have to pay for the goods held in its inventory

and its working capital needs would fall by the amount due to the

supplier (accounts payable)


Planning & economic evaluation of transportation projects

Working Capital needs

Formula

 Working capital need increases as inventory and amounts owing by


customers (accounts receivable) increases and reduces as the amounts
owed to suppliers (accounts payable) increases

Net working capital requirement = Inventory + Accounts


receivables – Accounts payable
Planning & economic evaluation of transportation projects

Working Capital needs

Accounts Receivable

 Estimated revenue = 1825 for the year and

 Business offers 45 day credit terms to its customers

 Account receivable = 45 X 1825/365 = 225

 Accounts receivable % = 225/1825 = 12.3%

 What does these mean?

 On average, at any one time, the working capital need resulting from
offering credit to customers will be 225 or 12.3% of revenue

 What happens the credit period given increases to 90 days? (working capital
needs?)
Planning & economic evaluation of transportation projects

Working Capital needs

Inventory

 Business holds 30 days inventory

 As inventory is carried at cost we need to base the calculation of


inventory levels on the cost of sales

 Inventory = Days inventory X Daily cost of sales


Planning & economic evaluation of transportation projects

Working Capital needs

Accounts payable

 The need for working capital to fund inventory and accounts


receivable, can be reduces by increasing the credit terms with
suppliers (accounts payable)

 Accounts payable = Days credit X Daily cost of sales

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