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Hello Sir, I’ve been solving the NPV questions lately and my most commonest mistake is regarding the release of working capital. In every question the life of the project is given, and after the end of the project it is assumed that the working capital will be released at the last year.However, I’ve come across few answers in the kit where the working capital is not released and the cashflows are only stated with the inflated amounts. I’m now unsure about this particular thing and don’t know how to deal with it. Please help.
Thanks.
There have only been two occasions in the actual exam where the working capital was not released at the end of the project.
On one occasion the question specifically said to ignore the release of working capital, so that was not a problem 🙂
The other occasion was last December. The question had said that the machine would last 4 years at which stage it would be replaced.
Because of that, the examiner assumed in his answer that we would still be producing the product (on the new machine) and that therefore the working capital would still be needed, and therefore not released.However, he did realise that it was a bit unfair of him, and he therefore specifically said that if you had released the working capital then you would still be given full marks (even though the final answer would be a bit different).
Best in the exam is to always assume that the working capital is released unless the question specifically says that it is not.
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