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  5. Working Capital Management

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FIN3702 Assignment 2 Due 30 September 2024 (Detail Answers)
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Question 01: The firm’s initial annual profits on total assets are... • To calculate this, we need to find the annual profits generated from both current and fixed assets.

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FIN3702

Assignment 2

Semester 2

Unique No: 215721

DUE 30 September 2024

,Question 01: The firm’s initial annual profits on total assets are...

• To calculate this, we need to find the annual profits generated from both
current and fixed assets.



𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅10,000 × 5%
= 𝑅500\{𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠}
= 𝑅10,000 \𝑡𝑖𝑚𝑒𝑠 5\%
= 𝑅500𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅10,000 × 5%
= 𝑅500 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅20,000 × 15%
= 𝑅3,000\{𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠}
= 𝑅20,000 \𝑡𝑖𝑚𝑒𝑠 15\%
= 𝑅3,000𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅20,000 × 15%
= 𝑅3,000 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅500 + 𝑅3,000
= 𝑅3,500\{𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡} = 𝑅500 + 𝑅3,000
= 𝑅3,500𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅500 + 𝑅3,000 = 𝑅3,500

𝑨𝒏𝒔𝒘𝒆𝒓: 𝟑. 𝑹𝟑, 𝟓𝟎𝟎



Question 02

Net Working Capital Calculation:

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 𝑅10,000 − 𝑅5,000 = 𝑅5,000\{𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙}
= \{𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠} − \{𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠}
= 𝑅10,000 − 𝑅5,000 = 𝑅5,000𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 𝑅10,000 − 𝑅5,000
= 𝑅5,000 𝑁𝑒𝑤 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅10,000 − 𝑅3,000
= 𝑅7,000\{𝑁𝑒𝑤 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 } = 𝑅10,000 − 𝑅3,000
= 𝑅7,000𝑁𝑒𝑤 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅10,000 − 𝑅3,000
= 𝑅7,000 𝑁𝑒𝑤 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅20,000 + 𝑅3,000
= 𝑅23,000\{𝑁𝑒𝑤 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠} = 𝑅20,000 + 𝑅3,000
= 𝑅23,000𝑁𝑒𝑤 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅20,000 + 𝑅3,000
= 𝑅23,000 𝑁𝑒𝑤 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑅7,000 − 𝑅5,000
= 𝑅2,000\{𝑁𝑒𝑤 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙} = 𝑅7,000 − 𝑅5,000
= 𝑅2,000𝑁𝑒𝑤 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑅7,000 − 𝑅5,000 = 𝑅2,000

, • Annual Profits on Total Assets Calculation:

𝑁𝑒𝑤 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅7,000 × 5%
= 𝑅350\{𝑁𝑒𝑤 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠}
= 𝑅7,000 \𝑡𝑖𝑚𝑒𝑠 5\%
= 𝑅350𝑁𝑒𝑤 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑅7,000 × 5%
= 𝑅350 𝑁𝑒𝑤 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
= 𝑅23,000 × 15%
= 𝑅3,450\{𝑁𝑒𝑤 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠}
= 𝑅23,000 \𝑡𝑖𝑚𝑒𝑠 15\%
= 𝑅3,450𝑁𝑒𝑤 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
= 𝑅23,000 × 15% = 𝑅3,450 𝑁𝑒𝑤 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡
= 𝑅350 + 𝑅3,450 = 𝑅3,800\{𝑁𝑒𝑤 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡}
= 𝑅350 + 𝑅3,450 = 𝑅3,800𝑁𝑒𝑤 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡
= 𝑅350 + 𝑅3,450 = 𝑅3,800 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡
= 𝑅3,500\{𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡}
= 𝑅3,500𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅3,500

• Risk of Technical Insolvency:
Shifting assets to fixed assets reduces liquidity but might increase profitability
if the assets are used effectively.

Answer: 1. decrease; increase; increase

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