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Reference question 1(a) of December 2013
Question said that “The level of working capital investment at the start of each year is expected to be 10% of of the sales in that year”But in the answer Working capital investment cash outflow shown as difference between send and first year , third and second year and so on…
I dont understand .
Can you please explain?I will answer, but in future please ask in the Ask the Tutor Forum is you want me to answer – this forum is for students to help each other.
Working capital is the money needed to finance the working capital i.e. inventories, receivables etc..
At the start of each year we need the level to be 10% of the coming years sales.
So…..if the first years sales are (for example) 200, then we need to start with working capital of 20.
If the second years sales are 250, then we need to start the second year with working capital of 25. However we already have working capital of 20, so all the need is an extra 5.The free lectures on investment appraisal will help you.
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