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Dear Tutor,
Need your urgent help. Why is the working capital for Q1 CJ Co project A 11,000 for year 1, 12000 for year 2, 12000 for year 3, 13000 for year four? Shouldn’t it be $250,000 increasing at an annual inflation of 5%? Please help.
Regards
$250,000 is needed initially (time 0).
It is to increase in line with the general inflation, which is 4.5%.
Therefore the total needed at time 1 is 250,000 x 1.045 = 261250.
However they already have 250,000, so the extra needed is the difference of 11,250. (the answer has rounded to the nearest thousand, which is fine).The total needed at time 2 is 261250 x 1.045 = 273006.
However they now already have 261250, and so the extra needed is the difference of 11,756 (or 12,000 to the nearest thousand).And so on….. 🙂
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