To calculate the impact of net working capital (NWC) on the project's total cash flows in year 2, we first need to understand how changes in NWC affect cash flows. NWC is defined as:

$\text{NWC} = \text{Receivables} + \text{Inventory} - \text{Payables}$

The change in NWC from one period to the next will affect cash flows: an increase in NWC implies that cash is tied up in working capital, resulting in a negative impact on cash flows, while a decrease in NWC releases cash, resulting in a positive impact.

Step 1: Calculate NWC for Year 1 and Year 2

Using the values provided:

Year 1 NWC

$\text{NWC}_{\text{Year 1}} = 22750 + 42160 - 30000 = 34910$

Year 2 NWC

$\text{NWC}_{\text{Year 2}} = 26000 + 38500 - 27450 = 37050$

Step 2: Calculate the Change in NWC from Year 1 to Year 2

$\text{Change in NWC} = \text{NWC}_{\text{Year 2}} - \text{NWC}_{\text{Year 1}} = 37050 - 34910 = 2140$

Step 3: Interpret the Impact on Cash Flow

Since the NWC increased by 2140 from Year 1 to Year 2, this increase represents cash tied up in working capital, which has a negative impact on cash flows in Year 2.

Final Answer

The impact of net working capital on the project's total cash flows in Year 2 is: $\text{Impact on Cash Flow} = -2140$

Would you like a further breakdown or details on other aspects of this calculation?

Here are 5 related questions for further exploration:

1. How does NWC impact cash flows in the other years (e.g., Year 1 or Year 3)?
2. What specific changes in receivables, inventory, and payables contributed to the cash flow impact?
3. How would changes in payables or receivables alone influence the NWC?
4. Can optimizing inventory management improve NWC and cash flow?
5. What are typical strategies to manage NWC effectively for project-based firms?

Tip: Tracking changes in NWC regularly helps assess liquidity and optimize cash flow, especially in projects with varying demand.