MARCH JUNE 2019 TALAM CO

The revenue in the first year is 5,160. Therefore at the start of the first year (i.e. time 0) they need working capital of 20% x 5,160 = 1,032. Had the question said nothing else, then they would hold that amount of working capital throughout the project and then as usual get it back as an inflow at the end of the project. However here the question says that as the revenue increases or decreases the working capital needs to be increased or decreased. The revenue in the second year increases by 24,883 - 5,160 = 19,723. Therefore the working capital needs to be increased by 10% x 19,723 = 1,971 at the start of the second year (i.e. time 1). It is the same arithmetic for each of the year until the final year when all of the working capital is recover in the normal way.

Thank you Sir, much appreciated !

You are welcome :-)