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Why always in these types of FCFF method working capital investment is taken at year 1 and not at year 0???? I don’t understand this
The same applies to normal investment appraisal questions as well.
The ‘childish’ answer is that most questions specifically state when the working capital is needed, and normally that is immediately i.e. at time 0. (Do appreciate that despite the annoying headings that the examiner tends to use in his answers, time 0, time 1, etc are points in time that are one year apart – they are not ‘years’. So Time 0 is the start of the first year, time 1 is one year later – the end of the first year and start of the second year, time 2 is another year later – the end of the second year and start of the third year, and so on).
The reason that it is normally needed at time 0 (unless obviously the question says differently) is that given it is the money needed to be able to build up inventory levels etc.. it is needed at the start of the project which is at the start of the first year, which is time 0.
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