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hello sir ..a little confusion
If questions mentions that “machinery will be replaced at the end of last year” ..then according to examiner we don’t take back our balance of WC in last year as the project is on going. so there will be no cash flows relating to WC in the last year.
But even if the que mentions this ..and we take out WC at the end of last year..no marks will be deducted for this.So its our wish how we want to solve the question in this regard. Am i right ?
Q2.
In DCF technique, one of the reservation we make is that it only focuses on cash flows and not profit. But i do not understand the difference …if we are getting Positive NPV , it itself means that we are in profit. What else profit could it possibly envolve ..i am confused that cash flows and p/l are same as +ve or -ve NPV.
THANKSWith regard to the working capital, we assume that the working capital is recovered in the final year unless the question says that production will continue (in which case the working capital is still needed). If it is not made clear in the question then you will still get the marks for assuming that the working capital is recovered (whether or not the examiner does it in his answer).
From year to year, cash flows are not the same as the profits, for all sorts of reasons. In the profit statement we record the sales made and expenses incurred, but because of receivables and payables the cash received and paid during the year will be different – this is why we have the working capital flows. In the profit statement there will be a charge for depreciation each year, but this is not a cash flow (the cash flows are the original payment for the cost of the asset and the cash receipt when it is sold).
So if it is clearly mentioned in the question that the production is continued then we do not recover WC. If we do recover, marks wil be deducted right ?
The examiner has been inconsistent about this over the years. However in recent years he has sometimes not recovered the working capital on the basis that production is continuing.
But from what he has said separately, I am confident that you would still get the 1 (or possibly, but unlikely) 2 marks allocated to this point if you always recovered the working capital.
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