FCF – Incremental of Working Capital

Dear Sir,

Refer to Q2 Mar/June 2018 – Part Info as below: –

The new facilities will also require an immediate initial investment in working capital of $3 million. Working capital requirements will increase by the rate of inflation for the next three years and any working capital at the start of Year 4 will be assumed to be released at the end of the appraisal period.

Predicted inflation rates are as follows:
Year 1 2 3 4
8% 6% 5% 4%:

Why the working capital requirement yearly increased of cash flows are not as follow: –

Cash flows will be increased by rate of inflation% to ,
3M x 1.08 (Year 1) = 3.24M
3M x 1.08 x 1.06 (Year 2), = 3.434M
3M x 1.08x 1.06 x 1.05 (Year 3) = 3.606M

Instead just work out as “incremental WC” only …

3M x 0.08 = 240K (Year 1)
3.24M x 0.06 =194K (Year 2)
3.4344M x 0.05 = 172K (Year 3).

Thanks in advance for clarification .