Investment Appraisal and Working Capital

MIMuhammad Irfan6y ago

Hi, Need to ask that when using nominal discount rate we inflate the working capital each year if there is a separate inflation rate is available for working capital but if we have to discount at the real rate, then how we deal with the working capital investment? do we include the same amount each year or there is some other method? Thanks

John MoffatTutor6y ago#1

What you are asking it almost impossible in the exam because if working capital is inflating then the cash flow is only the extra each year (which is different from the way inflation affects all the other flows). If you are referring to a specific past exam question or a question in the BPP Revision Kit, then say which one and I will explain.

MIMuhammad Irfan6y ago#2

no there isn't any specific past paper question but what actually i am trying to ask that how we deal with working capital if we need to discount in real terms without inflation? is it that we have the working capital investment at time 0 and will recover the same amount in the final year of project??

John MoffatTutor6y ago#3

Yes - that would be correct.

MIMuhammad Irfan6y ago#4

Thanks now cleared

John MoffatTutor6y ago#5

You are welcome :-)

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