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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
–There 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
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