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Hi Sir,
In this question when calculating the working capital, why was the 6Mn multiplied by the 8% inflation rate instead of the 6% inflation which is relevant for the 02nd year?
The same has been done for Y3 & Y4 as wellThe Y3
Given rate – 5%
Multiplied by 6% (Answer sheet)The Y4
Given rate – 4%
Multiplied by 5% (Answer sheet)I am quite confused about this sir could you please explain sir?
Please find my workings below – This is considered wrong as per the answer sheet
1 2 3 4
W.Capital 6.48 6.87 7.21 7.50They need $6m at the start of the first year (time 0).
The inflation rate in the first year is 8% and so at the end of the first year/start of the second year (time 1) the need an extra 8% which is $0.48M (and so on in the later years).
Although the examiner annoying heads up the columns as year 1, year 2 etc., they are actually points in time that are 1 year apart.
Time 0 is the start of the first year.
Time 1 is the end of the first year/start of the second year,
and so on.
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