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Greetings sir.
A) In q 113 and 114 , we were asked for the present value but the answer page included the T0 while doing the total of present value thus actually calculating the npv instead, as per my understanding.
Why is that ?B) In Q115 we were asked the NET present value. But I dont understand: Why in Q113 and q114 we returned the working capital at their last years respectively after they were insterted in T0, whereas the same type of question was repeated this time and the working capital was inserted at T0, but this time we in our calculations to find NPV did not return the WORKING CAPITAL investment back to the company after the 1 yr project was over. If working capital was included in T0 it should have been returned and this positive cash flow should have appeared in T1 along with the income and expenses.
Please remove the confusions, our knowledgeable esteemed sir.
Sorry, but I am waiting for a new edition of the Kit to arrive from BPP.
If you type out the first line of each of the questions then I will see if they are in my edition.
It’s edition Sept 2022 – jun 2023.
113) A project has the following cash inflows
114) AW Co needs to have $100,000 working capital…
115) NCW Co is considering investing $10,000 immediately…
113 The answer is not calculating the NPV because it is only asking for the PV of the working capital flows. The working capital flows include an outflow at time 0. (For the NPV we would need to know all of the flows relating to the project).
114 Same as my reply to 113.
115 There is no mention of any working capital requirement in this question. The $10,000 is the initial cost of the investment which is nothing to do with working capital.
I see…
113) So if working capital outflow begins at T0 it won’t be considered NPV calculation, only unless a capital investment is made at T0.
115) $10,000 was not working capital but capital investment.
The NPV is calculating the net present value of all flows relating to the investment.
I know that $10,000 is not working capital, which is what I wrote in my previous reply.
Had you watched all of my free lectures before attempting these questions?
I was just rehearsing for you to check my summary whether I understood you
correctly ?You said:
113 The answer is not calculating the NPV because it is only asking for the PV of the working capital flows. The working capital flows include an outflow at time 0. (For the NPV we would need to know all of the flows relating to the project).My question is – if the working capital flow include an outflow at time 0 – won’t that be considered the NPV because all of the flows relating to the project are now being considered- meaning time 0’s negative content as well.
All inflows and outflows (including working capital) are relevant if asked to calculate the NPV of an investment.
Again, have you watched all of my lectures, because this is all made very clear in the lectures?
Ok I misunderstood. I thought that if the entire question only mentions working capital – then if t0 is involved having working capital outflow – it will be considered npv calculation not pv calculation. Why ? Because question showed a world only containing working capital. And no other outflow like investment etc.
But you are teaching if I am not misunderstanding – that even if the question mentions working capital and no other details like investment, npv can only be calculated if those other details are present, it is a necessity for npv. Otherwise we consider question is focused on pv even if t0 containing a working capital outflow (ie negative outflow).
The net present value of any investment calculates the present value of all of the flows that result from making the investment.
In arriving at the NPV we are taking the PV of all of the flows involved. If you question simply asks for the PV of certain of the flows then this is not the NPV of the whole investment.
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