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Dear tutor,
there is following phrase in question: “The theme park would cost a total $400mln and could be constructed and working in 1 year’s time. Half of the 400 mln would be payable immediately, and half in 1 year’s time. In addition working capital of 50 mln will be required at the end of year 1….”
So taking into account, that theme park could be “working in 1 yr’s time”, I thought that operational cash flows would begin in year 1, but in answer to the question they calculate from year 2. I can’t understand why they calculate from year 2.The first year starts now (time 0) and ends in 1 years time (time 1).
The second year starts in 1 years time (time 1) and finishes in 2 years time (time 2).
We always assume that operating flows occur at the ends of years (unless obviously told differently). So it is it working in 1 years time, the first flows will occur in the second year and be payable/receivable at time 2.
well… “now” is the end of year 0, in 1 year ( i.e. end of year 1 or start of year 2) it just starts working and after working for 1 year it will get operating CF at the end of year 2, now it makes sense for me.
Thank you very much!
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