[Killqa]

Darn Co has undertaken market research at a cost of $200,000 in order to forecast the future cash flows of an investment project with an expected life of four years, as follows:
Year 1 2 3 4
Sales revenue ($000) 1,250 2,570 6,890 4,530
Costs ($000) 500 1,000 2,500 1,750

These forecast cash flows are before taking account of general inflation of 4·7% per year. The capital cost of the investment project, payable at the start of the first year, will be $2,000,000. The investment project will have zero scrap value at the end of the fourth year.

(The level of working capital investment at the start of each year is expected
to be 10% of the sales revenue in that year.)

This was the question that i did.

I do not understand why for Year 1, the working capital would be the incremental value of 150.86 instead of 130.88. I am very confuse on how to do working capital for DCF.

Answer as below.

Year 1 2 3 4
Inflated sales revenue ($000) 1,308·75 2,817·26 7,907·87 5,443·58
Working capital ($000) 130·88 281·73 790·79 544·36
Incremental ($000) (130·88) (150·86) (509·06) 246·43

Thanks

[Killqa]

Hi sir,

I have another question on delayed cash flows. Example: cash inflow that is recieved at year 3 instead of year 1.

Why would dividing the NPV of the cash flow by the PV table(year 2) get you the answer?

I understand how to use the method to get the answer but I do not know why is it like this.

Thanks!

[Author]

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