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In this question, with regards to the Working Capital, the examiner states:
“Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced.”
Here, he has simply recovered 90000 $ worth of Working Capital in year 5. He is thinking that because project will end, machine will be sold for scrap , so working capital that we initially invested will be recovered at the end of asset’s life.
My question is how is this working capital recovered in the real world? It seems a bit utopian.
In the context of the given question, since the machine will be sold for scrap and not replaced, the working capital initially invested is no longer needed for ongoing operations.
Therefore, the $90,000 invested in working capital can be recovered by liquidating the assets tied up in it. This is why the examiner assumes that the working capital will be fully recovered at the end of the project.
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