DCF working capital inflation — OpenTuition Forums

Aaccastudent7y ago

In example 5 of chapter 8 , we have invested 200 in WC at time 0 and recovered 200 at time 3. In BPP , the effect of inflation is also applied on WC ..i.e if our example involved inflation rate for WC @5% ..we would have cash outflow in first year of 10 = 200 × 1.05^1 - 200. Similarly in year 2 outflow of 20.5 and in year three we will have inflow of 231. There was no information given in our example relating to this so we didn't do anything. But what should we do in exam .. if general inflation rate is given ..should we apply that ? Or any other cashflow's specific rate of inflation like costs' ? Thanks

John MoffatTutor7y ago#1

The wording in exam questions will make it clear whether or not to inflate the working capital. If it were to be inflated it would not be at the general rate of inflation (unless the question specifically said to do that). More likely it would inflate at the same rate as the inflation applicable to the revenue. However, again, exam questions have always made it clear if the working capital was to be inflated. If the question you are referring to is in the current edition of the BPP Revision Kit, then tell me the number of the question and I will explain.