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Explain Regression analysis method in estimation of working capital.
In regression analysis method, statistical tool is used to calculate working capital.
- Working capital = Int + m*R
Int = intercept, m = slope, R = Revenue
- Σy = na + bΣx
- Σxy = aΣx + bΣ2
Where x = sales, y = working capital, n = years
Advantages of this method include −
- Accurate method for bigger volume of data.
- It is a proven method.
Disadvantages of this method include −
- Not east to understand.
- Calculations are complicated as compared to percentage sales method.
By using following table, calculate the data using regression analysis method, forecasted sales = 500
|Year||Sales (X)||Working capital (Y)|
The solution is given below −
|Year (n)||Sales (X)||Working capital (Y)||X*Y||X2|
|Σn = 6||Σx = 700||ΣY = 470||ΣX*Y = 56825||ΣX2= 85250|
- Σy = na + bΣx => 470= 6a+700b
- Σxy = aΣx + bΣ𝑥2=> 56825 = 700a + 85250b=> (by dividing with 25) => 2273 = 28a + 3410b
- By multiplying Σy with 28 and Σxy with 6, we get,
- 13160 = 168a+19600b
- 13638 = 168a +20460b
By solving the above two equations, we get => b = 0.56 and a = 13
- Working capital = Int + m*R => 13+0.56(500) => 293
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