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How can I know when to recover working capital at the end of the project, in NPV calculation?
I’m a bit confused, In some past questions, it’s not stated if the working capital is to be recover at the end of the project or not. For instance, in question 1, June 2013, HWC Co. the working capital was not recovered at the end of the project, but in question 1, December 2013, Dam Co. the working capital was recovered at the end.
Can someone please help me out?
There have only been two questions in the examination where the working capital has not been recovered.
In one of them, the question specifically said to ignore the recovery of working capital, so not problem there 🙂
In the other one (which I think is the one you are referring to), the question said that although the machine would last for 4 years, it would then be replaced. This suggests that whatever product we are making would continue to be made, and that therefore the working capital would still be needed (and so not recovered).
This was a strange thing for the examiner to do. He realised this and said that if students had recovered the working capital then they would still get full marks (even though the final NPV would obviously be different).So….the rule for the exam is always recover the working capital unless the question specifically says not to 🙂
Many thanks John for your quick response & explanation. I really appreciate it.
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