Hello John,
A Co needs to have $100,000 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 A co money cost of capital is 12%.
What is the PV of the cash flow relating the WC?
1. The answer is $(21260)
2. Could you please explain how to obtain the answer? Solution provided in the kit is a bit complicated to understand.
Thanks
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Investment Appraisal-Working Capital
5y ago#1There is an outflow of 100,000 at time 0
There is another outflow of 10,000 at time 1 (because if the inflation of 10%)
At time 2 there is an inflow of 110,000 as all the working capital is recovered.
Then just discount those flows at 12% per annum.
Hello John,
Thank you for your answer.
Therefore in this question working capital is regarded as well as the inflation on it is regarded as a cash outflow; and thus when we release both the working capital and it's inflation?
Thanks
5y ago#3The question says that the amount of working capital will stay constant in real terms. That is why they have to spend another 10,000 at time 2.
The amount recovered is always equal to the amount of cash spent on working capital in the previous years.
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