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- This topic has 7 replies, 2 voices, and was last updated 3 years ago by
John Moffat.
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- May 31, 2021 at 6:28 am #622357
Hi Sir, I couldn’t solve this question……
AW Co needs to have $100,000 working capital in place immediately for the start of a 2 years project. The amount will stay constant in real terms. Inflation is running at 10% per annum, and AW Co’s money cost of capital is 12%.
What is the present value of the cash flows relating to working capital?
* Please explained more on – amount will stay constant in real terms
Thankssss
May 31, 2021 at 8:37 am #622388To stay constant in real terms the level of working capital will have to increase at 10% per year.
They need 100,000 at time 0.
At time 1 they will need it to be 100,000 x 1.1 = 110,000. They already have 100,000 so the need an extra 10,000.
If the project were to continue then at time 2 they would need an extra 10% x 110,000 = 12,100 and so on.
May 31, 2021 at 11:08 am #622405Thanksss sir, my final answer is $21260 is it correct?
May 31, 2021 at 2:11 pm #622426Yes it is (although why are you attempting a question for which you do not already have an answer? 🙂 )
May 31, 2021 at 2:30 pm #622433Because the answer it gave is $21060, so I’m not sure if there is a typo in the answer.
May 31, 2021 at 2:54 pm #622442If you used the discount factors from the tables then the answer is $21,260.
Maybe there is a typo in your book, or maybe they used the formula for the discount factors in which case there will be rounding differences because the tables are rounded to three decimal places. Rounding differences are irrelevant in the exam.
It is strange that your book does not show their workings.
May 31, 2021 at 4:00 pm #622463Ya….the book only show me the final answer, by the way Thank You Sir!!!!
June 1, 2021 at 7:22 am #622540You are welcome 🙂
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