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March 20, 2016 at 3:13 pm
I am confused about the concept of working capital recovery, as you said we assume to recover working capital at the end of project, but in cases where incremental working capital is required, why we assume it to be recovered in the next year? for example if we required another 30000 of working capital in second year, we’ll only be required to invest an additional 10000, because the 20000 invested previously would have been recovered, right?
Similarly when the working capital requirement reduces from previous year we show it as an inflow because we assume it to be recovered, lets say if 10000 working capital is required for second year and as we have invested 20000 previously we would show an inflow of 10000 in year 1 (i.e the start of year 2), assuming the 10000 to be recovered before the end of project (by the end of year 1)?
March 20, 2016 at 3:32 pm
My second question is that as you said that op cash flows are profits expressed in terms of cash, so its basically the net, of inflow from sales, and the cash paid out for inventory, labour, overheads etc, so why we need to account for working capital separately?
I mean, working capital is the cash stuck in receivables & inventory, & if we are taking cash flows for each year, isn’t it that these things have already been accounted for?
John Moffat says
March 20, 2016 at 7:53 pm
What you have written in your first comment is correct.
With regard to your second comment, in the calculation of profit will be the cost of the goods that were sold. If, for example, you increased inventories (which is part of working capital) then you would be paying out extra cash.
March 21, 2016 at 7:58 am
So effectively, working capital is being recovered on an yearly basis?
March 21, 2016 at 4:04 pm
Not necessarily recovered. It is adjusted on a yearly basis (if the question tells you to) which might mean more is needed or less is needed, and then is all recovered at the end of the project (again, unless the question says not) 🙂
March 22, 2016 at 5:53 am
Now I got it, the amount given in questions for working capital is the total amount that would be required for working capital, if more than previous, more needs to be invested. If its less, it means that the amount previously invested, is released, thus showing an inflow.
Thanks John 🙂
March 22, 2016 at 6:22 am
You are welcome 🙂
February 24, 2016 at 6:49 pm
Why do we charge the working capital in year 0rather than in year 1?
February 24, 2016 at 10:50 pm
There is no such thing as year 0 or year 1.
Time 0 is a point in time and is the start of the first year.
Time 1 is one year later – it is the end of the first year and the start of the second year.
Time 2 is another year later – the end of the second year and the start of the third year.
Unless you are told differently in a question, working capital is first needed at the start of the first year which is time 0.
January 25, 2016 at 8:29 pm
Can you explain what Incremental Working Capital is, and is relevant for the NPV calculation?
Thank you in advance.
January 26, 2016 at 7:35 am
Incremental means extra.
So if extra working capital is needed in later years, then it is relevant – the extra is a cash outflow. (And at the end of the project we assume all the working capital is recovered, unless told differently)
January 27, 2016 at 6:48 pm
Sir Can you please explain thn Why in DEC 2015 Investment appraisal question the working capital were not recovered? The question no where says that working capitals are irrecoverable. I am sorry if this is not the place to ask this question but this is confusing me. Thank you
January 28, 2016 at 7:57 am
It is because the question says that the machine will be replaced in 4 years time. Therefore presumably the working capital will still be needed because the product will still be produced.
(The examiner did this once before in another question, but did say that full marks would still be given if the working capital was recovered. I would guess he did the same this time.)
The correct place to ask is the F9 Ask the Tutor Forum 🙂
January 29, 2016 at 6:13 pm
Thank You So much for your reply that clears out the confusion. I understand this is not the right place:P but the problem was so much related it will surely clear for others as well 🙂
January 29, 2016 at 8:35 pm
(but others do look at the Ask the Tutor Forum 🙂 )
November 22, 2015 at 9:46 am
Whats the logic behind getting the working capital at the end of the life of the project? Why not treat it as any other cost and include it only once as a relevant cost.
November 22, 2015 at 10:01 am
The working capital is the money needed to finance higher inventories etc. that will be needed during the life of the project.
Once the project has finished, we assume that we no longer need to carry extra inventories etc. and therefore the money is released and is therefore an inflow.
March 10, 2015 at 1:53 pm
The video works for one minute and then it says cannot load movie. Tried opening in different browsers still no luck. Please help.
March 10, 2015 at 2:05 pm
The video is working fine and so the problem must be at your end.
Go to the support page – the link is above – and you should be able to find help there.
March 10, 2015 at 3:34 pm
Thankyou for the reply, I think maybe it’s a apple device problem. At a certain point it stops but if you skip it and go to a later part starts working. Happened with a couple of other lectures too. Will try laptop next time. Thanks again.
The lectures are very helpful, and it all starts to make sense. Thankyou!!!
November 4, 2013 at 4:47 am
Goodday sir. Please how did you get the 20,000. used for working capital. Am a little confused because usually we are supposed to be given a figure for working capital and its usually spread within all years by minusing it from the initial amount and then recouped at the end of the life of the project. pls help!!!! Thank you
November 4, 2013 at 8:11 am
The second sentence of the questions says ‘In addition a further $20,000 working capital will be required at the start of the project’ (I assume that you have downloaded the course notes that go with these lectures?).
We do not usually ‘spread within all years’ – the question will make it clear if there are any more outflows necessary.
We do assume that the working capital is released at the end of the project, and I have done that in this example.
November 4, 2013 at 9:57 pm
I noticed that in the answer provided on the ACCA website to Question 1 for the June 2013 F9 Paper, the working capital was not stated in year 1 and taken out in the last year but what was stated in each year was the increment (amount) caused by the yearly inflation rate of 4.7%. Why was this done that way? No where in the answer was the 500,00 working capital included.
November 5, 2013 at 7:50 am
The initial working capital of 500,000 is treated as an outflow at time 0 in the answer, which is what we normally do.
The question says that it is to increase by 4.7% each year and so the extra amount has been charged in each subsequent year – this is quite common in the exam.
The one thing that the examiner has not done in his answer is bring in the recovery of the working capital at the end of the machines life. If you had brought it in (as I would have done) then you would still have got full marks.
(The reason that he did not bring it in is because the question says that the machine is to be replaced, and he has therefore assumed that the working capital will still be needed.)
November 10, 2012 at 8:08 am
hi, the lectures are good and helpful. is there a way to download the lectures and use them as I travel.
September 15, 2012 at 10:24 am
right now for NPV ,we only look at working capitals effect on cash flows without considering profit or loss
February 17, 2012 at 10:45 am
because working capital invested at the start of project that’s why it can’t be spread across the whole project
January 11, 2012 at 8:48 am
this keeps getting better and better to understand
November 4, 2011 at 1:07 am
Why is the Working Capital not spread across the life of the project ?
April 3, 2012 at 1:51 pm
in practice it it but in theory it is not.
October 1, 2011 at 9:45 am
Why we need to assume the working capital can be pay back in the end of project?if the project make a loss.
May 31, 2013 at 1:04 am
cuz john said it lol
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