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dear sir this question is from june’13 q1
In addition to the initial cost of the new machinery, initial investment in working capital of $500,000 will be required.
Investment in working capital will be subject to the general rate of inflation, which is expected to be 4·7% per year?Note:- in here i do understand the incremental figure have to put according to the year, but problem is arising on final year, why do i have to do the inflation for the final year? if we do so then shall we not relies the total working capital on the final year?
The reason that the examiner did not recover the working capital in the final year was that the question said that the machine would be replaced – therefore the product would presumably still be produced and the working capital still needed.
However this was a strange thing to do, and the examiner said that students who did recover the working capital would still get full marks.
So do assume the working capital to be recovered in the final year, unless the question specifically says different.
Thanks sir for your kind full replay
Now if we recover the wc on the final yr then will it be 27 added and 600 deduct on the final year ?Not quite.
The outflows were 500 initially, followed by 24, 25 and 26 in the first 3 years – a total of 575.
So in the 4th year there would be an inflow of 575.
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