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Hi Mr Moffat,
I am confused with following question:
A project has the following projected cash inflows.
yr1 100,000 yr2, 125,000 yr3, 105,000
working capital is required to be in place at the start of each year equal to 10& of the cash inflow for that year. the cost of capital is 10%
what is the present value of working capital.In the answer, I understand each year need 10%, therefore,
T0 10,000
T1 12500
T2 10500
T3 0I understand, you put in / take out incremented from cash flow then add DF for PV
Therefore,
T0 (10000)
T1 (2500)
T2 2000This T3, I don’t understand.
T3 10500Why are we taking out 10500 from time period 3?
Thank you in advance.
Regards,
Lucy
We assume that working capital is only required during the life of the project and that therefore in the final year we recover all the working capital. The total working capital after 2 years is 10,500 and therefore we have an inflow of 10,500 in the final year.
I explain this, with examples, in my free lectures.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Thank you, I have watched all your lectures, they are very helpful. Thank you for this resources.
I know you suppose to get back the working capitals at the end of project. It’s just in this question, it didn’t say in plain words that project will finish in 3 years. So I was confused with the inflow of cash. I guess it give clues of year 3 is the end of project. I understood it now. Thank you.Regards,
lucy
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