NPV Jun 2013 Q1a

Hi! According to my assumption, WC was not released because in the question there is no indication that the company wanted to recover WC at the end of year 4. It solely depend on director's choice and normally you will see that where inflation rate affects WC, recovery is avoided. However, the tutor can say better.

Cherryblossom is not correct (and should not be answering in this Ask the Tutor forum). It is not a question of whether or not the directors want to recover it!! The working capital is there to finance the extra inventory, extra receivables, etc. that will occur if we do the new project. When the project comes to an end, we know longer need the extra inventory etc., and therefore the working capital is automatically released (it is not a question of choosing!!). So usually, in exam questions there is automatically a cash inflow because of the working capital at the end of the project. However, in the June 2013 question, the second sentence said that after 4 years the machine would be replaced. If it is going to be replaced then the working capital is still going to be needed (because we will still be producing the product) and therefore it will not be released. It was a bit unfair of the examiner to do this, and he did say later that if you had brought back the working capital as an inflow (as we usually do) then you would still have been given full marks (even though obviously the final NPV would have been different).

Thanks a lot!! Clarification much appreciated.

You are very welcome :-)