Question

Explain what is working capital and sunk cost?

Answer 1

Working capital - Working capital cane be defined as capital that is require to run day to day operations of a company. it is calculated as difference of current assets and current liabilities. It can also represent operating liquidity of a company. Managing of working capital includes managing inventory, accounts receivables, accounts payable and cash. Working capital of a company can be calculated using ratios like current ratio, cash ratio.

Current ratio = Current asset/current liabilities. It is desirable to have current ratio of a company above 1.2

Sunk cost - Sunk cost is the money which has already been paid and cannot be recovered. it can be best understood by an example. For example, there is a project of time period of 3 years. In first year, 100 dollars was invested. In 2nd year, it was understood that project is not beneficial. So, either project can be continued or stopped.

In this case, 100 dollars invested in 1st year is sunk cost because irrespective of whether the project is done or not. the amount invested cannot be taken back. Hence it is called sunk cost.