Economics Capital Budgeting Questions
There are several methods used for estimating working capital requirements in capital budgeting. These methods include:
1. Percentage of Sales Method: This method estimates working capital requirements as a percentage of projected sales. The percentage is based on historical data or industry averages.
2. Cash Budget Method: This method estimates working capital requirements by preparing a cash budget, which includes projected cash inflows and outflows. The difference between the two represents the working capital requirement.
3. Operating Cycle Method: This method estimates working capital requirements based on the length of the operating cycle, which includes the time it takes to convert raw materials into finished goods and sell them, and then collect cash from customers.
4. Regression Analysis Method: This method uses statistical techniques to analyze historical data and identify the relationship between sales and working capital requirements. This relationship is then used to estimate future working capital needs.
5. Projected Balance Sheet Method: This method estimates working capital requirements by projecting the balance sheet for the future period and identifying the changes in current assets and current liabilities.
It is important to note that different industries and companies may use different methods or a combination of methods to estimate their working capital requirements in capital budgeting.