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AW Co needs to have $100000 working capital in place immediately for the start of a 2 year project. The amount will stay constant in real terms. Inflation is running at 10% per year and AW Co money cost of capital is 12%. What is the present value of cash flow relating to working capital?
My question is why does the answer scheme not inflate the cash inflow when the working capital is released at the end of the project?It would help if you told me where to find the question (if it is a past exam question or a question in the current edition of the BPP Revision Kit).
However working capital does not inflate by itself. The company may need to increase it each year because of inflation, but at the end of the project the company simply gets back the total working capital that has been used.
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