Incremental Workin capital.

Please don't copy out questions in full because of copyright issues. I have the current edition of the BPP Revision Kit and so just giving the number of the question is enough :-) The start of the first year is time 0, and so at time 0 they need working capital of 10% x 100,000 = $10,000 (outflow). At time 1 (the start of the second year) they need the working capital to be 10% x 125,000 = $12,500. However they already have $10,000, so they need an extra $2,500 (outflow). At time 2 (the start of the third year) they need the working capital to be 10% x 105,000 = $10,500. However they already have 12,500 so they take back $2,000 (inflow). Time 3 is the end of the third year and the end of the project and so the working capital all released. As at time 2 they had 10,500 so at time 3 they get back $10,500 (inflow). We always use incremental working capital - how it applies depends on the wording of the question. Sometime it is just required at the start of the project, other times (like here) we need to keep adjusting the amount each year.

You are welcome, and thank you for the comment :-)