ACCA FM · Guided practice (Show me how)
Chapter 8: Relevant cash flows for DCF
Working capital in the NPV: timing, increments and release
(a) Finite project. A machine costs $100,000 to purchase. In addition a further $20,000 working capital will be required at the start of the project. The project is expected to last 4 years and to have a scrap value of $20,000 at the end of its useful life. Net operating cash flows are expected to be $30,000 p.a. for the first two years and $40,000 p.a. for the following two years. All operating flows arise at the ends of years. Calculate the net cash flow for each year.
(b) Continuing production. A machine costs $15,000 and is expected to last for 4 years with a scrap value of $2,000 at the end of 4 years. Sales revenue for years 1 to 4 is estimated at $5,000, $11,000, $8,000 and $9,000, and operating costs at $2,000 a year. Working capital of 10% of the year's revenue is required at the start of each year. Calculate the net cash flow for each year.
Working capital in at the start, out at the end
Calculate the machine project's initial and final-year net cash flows for the finite project.
Working capital that moves with revenue
Calculate the project's working capital changes and net cash flows in the specified years for continuing production.
Opening this exercise…