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Hi this question i totally can’t figure it out….
A project has the following projected cash inflows.
Year 1 100,000
Year 2 125000
Year 3 105000Working capital is required to be in the place at the start of each year equal to 10% of the cash inflow for that year. The cost of capital is 10%.
What is the present value of the working capital?
There is an outflow at time 0 of 10% x 100,000 = $10,000
At time 1 we need the working capital to be 10% x 125,000 = $12,500. However there is already 10,000 so we need an extra outflow at time 1 of $2,500.
At time 2 we need the working capital to be 10% x 105,000 = $10,500, However there is already 12,500 so there is an inflow at time 2 of the difference of $2,000.
At the end of the project the working capital is, as normal, recovered and there is therefore an inflow at time 3 of 10,500.
Thank you sir, but the answer provided by the book is $(2735). Is it because we need to discounted it by discount factor?
Yes. I have explained to you the cash flows, but given that the question asks for the present value of the flows then I am assuming that you can do the easy bit of discounting 🙂
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