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Hey Sir…i have been doing some NPV questions and im getting a real hard time with the working capital in the last year of investment, whether to release the investment or use the increase or decrease in working capital.So can you help me to identify in questions when to release and when to use the difference?….thanks in advance
Almost always, the rule is that the working capital is released at the end of the project.
One obvious exception to this is if the question specifically says that it is not released (which is not common, but certainly happened once).
The other occasion happened recently. The question said that the machine lasted 4 years and would then be replaced. Because it was being replaced, the examiner in his answer assumed that therefore working capital would still be needed and so was not released.
However, because it was very unusual, the examiner did say that if students did release the working capital then they would still get full marks (even though obviously the final NPV would be different).I hope that makes it clear 🙂
Thanks so much for your speedy reply. I’m sure the question that you are referring to was where my problem lies since the question didn’t state whether to release or not and it was mainly based on an assumption that you should have not released the working capital. Thanks for explaining it further for me
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