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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 7.50Although the examiner annoyingly heads up the columns year 1, year 2 etc., they are never years but are points in time that are 1 year apart.
They need $6m at the start of the first year, which is time 0.
The inflation in the first year is 8% and so at the end of the first year/start of the second year they need an extra 8% x $6m = $0.48m. It is the same idea for the future flows.
The idea of the flows being at time 0, time 1, i.e. points in time that are one year apart is fundamental to both Papers FM and AFM.
Apart from working capital (and any other flows specifically mentioned) we always assume that operating flows (revenue and expenses) occur at the ends of years and so the first operating flow is at time 1.
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