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INFLATION Investment Appraisal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › INFLATION Investment Appraisal

  • This topic has 1 reply, 2 voices, and was last updated 8 months ago by John Moffat.
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  • May 23, 2022 at 4:27 pm #656264
    Anonymous
    Inactive
    • Topics: 29
    • Replies: 39
    • ☆☆

    AW Co needs to have $100000 working capital in place immediately for the start of a 2 year project. The amount will stay constant in real terms. Inflation is running at 10% per year and AW Co money cost of capital is 12%. What is the present value of cash flow relating to working capital?
    My question is why does the answer scheme not inflate the cash inflow when the working capital is released at the end of the project?

    May 23, 2022 at 8:12 pm #656276
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51543
    • ☆☆☆☆☆

    It would help if you told me where to find the question (if it is a past exam question or a question in the current edition of the BPP Revision Kit).

    However working capital does not inflate by itself. The company may need to increase it each year because of inflation, but at the end of the project the company simply gets back the total working capital that has been used.

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