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Hi Sir, I couldn’t solve this question……
AW Co needs to have $100,000 working capital in place immediately for the start of a 2 years project. The amount will stay constant in real terms. Inflation is running at 10% per annum, and AW Co’s money cost of capital is 12%.
What is the present value of the cash flows relating to working capital?
* Please explained more on – amount will stay constant in real terms
Thankssss
To stay constant in real terms the level of working capital will have to increase at 10% per year.
They need 100,000 at time 0.
At time 1 they will need it to be 100,000 x 1.1 = 110,000. They already have 100,000 so the need an extra 10,000.
If the project were to continue then at time 2 they would need an extra 10% x 110,000 = 12,100 and so on.
Yes it is (although why are you attempting a question for which you do not already have an answer? 🙂 )
Because the answer it gave is $21060, so I’m not sure if there is a typo in the answer.
If you used the discount factors from the tables then the answer is $21,260.
Maybe there is a typo in your book, or maybe they used the formula for the discount factors in which case there will be rounding differences because the tables are rounded to three decimal places. Rounding differences are irrelevant in the exam.
It is strange that your book does not show their workings.
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