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Hello mr john, I hope you are good.my ques is
aw co needs to have $100000 working capital in place immediately for the start of a 2 year project.The amount will stay constant in real terms.Inflation is running at 10% per year ,and aw co’s money cost of capital is 12%.
what is the present value of the cash flows relating to working capital?p.s. in solutions present value is calculated on incremental cash flows. WHY?
They need at an outflow of $100,000 at time 0.
At time 1 they need the working capital to be 10% higher, so they need an extra $10,000 in order to bring the working capital up to the $110,000 required.
Do watch my free lectures on investment appraisal with working capital, because I do explain this point.
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