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Hi Sir,
I have a doubt regarding the working capital calculation which is being done for base case NPV.
I do not understand how that calculation is working. Why is year 2 and 3 positive, but year 1 negative even though the revenue is increasing?
Please help me navigate this.
Thank you so much!
Each year we calculate the level of working capital that is needed. However given that there is already working capital at the end of the previous year we only need to adjust the total to the new level required.
So if I am not wrong, then in year 1 it will be 10 – 4, which is 6, then the year 2 will be 1.2 + 6 and so on?
At time 0 (which is the start of the first year) the working capital requirement is 10M as per the question.
At time 1 (which is the end of the first year / start of the second year) the requirement is 15% of the second years revenue and so is 15% x 40M = 6M. They already have 10M and so there is a reduction (so an inflow) of 4M, leaving the total working capital at 6M.
At time 2 (which is the end of the second year / start of the third year) the requirement is 15% of the third years revenue and so is 15% x 48M = 7.2M. They already have 6M and so they need an extra 1.2 M (so an outflow).
It is the same logic in each of the following years.
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