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Hi tutor,
I have a question on working capital inflation when calculating NPV.
1)
Qn: project will last for 4 years. An initial investment in working capital is required and working capital will follow the general rate of inflation. Working capital recovery is to be ignored.Working capital increment should stop at year 4, rather than at year 3, right?
If working capital recovery is to be considered, then working capital increment should stop at year3, and the recovery will be in year 4. The recovery amount will be the year 3 inflated working capital amount. Is this correct?
Also, when evaluating leasing versus buying, all financing costs are tax deductible, right?
Hope to hear from you, thanks 🙂
With regard to working capital, if working capital recovery is to be ignored, then yes – the increment will stop at time 4.
With lease versus buy – yes, all costs are tax allowable (but interest is never included in the cash flows, because (as always) it is dealt with in the discounting)
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