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I noticed in a question where we were asked to calculate NPV, initial working capital investment was given ( at year 0). I now noticed that at the end of the investment project (say 4years), the amount of working capital (as in year 0) was included, this time as a cash inflow.
Please I’m a little confused about this treatment of working capital for the purpose of calculating NPV. Please can you explain further.
Thank you.
The reason working capital is needed at the start is to finance (for example) extra inventory and extra receivables as a result of the project.
When the project finishes, the extra working capital is no longer required and therefore the money is recovered.
(It might help to watch my free lecture on investment appraisal)
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