December 2013 exam – Q1 – Working Capital

Could someone run through with me how the working capital element of Q1 from the December 2013 exam is worked out please?

I made a massive error in the exam of not compounding the inflation up each year, so instead of saying (for year 3) that the sales of $6890 were $6890 x 4.7% ($7213.83) then $7213.83 x 4.7% ($7552.88) then $7552.88 x 4.7% = $7907.87. I think because the question was laid out differently than normal I just forgot to do this.

Anyway, lessons have been learnt there, but the working capital bit has got me stuck.

It says “The level of working capital investment at the start of each year is expected
to be 10% of the sales revenue in that year.”

The model answer gives:

Year 1 2 3 4
Inflated sales revenue ($000) 1,308·75 2,817·26 7,907·87 5,443·58
Working capital ($000) 130·88 281·73 790·79 544·36
Incremental ($000) (130·88) (150·86) (509·06) 246·43

The working capital bit is fine, as it is just 10% of the inflated sales. but where is the incremental bit coming from? In the actual template answer in year one it is (150.86), year 2 (509.06), year 3 246.43 and year 4 544.36.

And then when working out the overall NPV (130.88) is subtracted from the answer.

Can anyone help please?