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Fernhurst Co will also need to make an immediate investment of $1,025,000 in working capital. The working capital will be increased annually at the start of each of Years 2 to 4 by the inflation rate and is fully recoverable at the end of the project’s life.
The expected annual rate of inflation in the country in which Fernhurst Co is located is 4% in Year 1 and 5% in
Years 2 to 4.Working capital for Year 1 is 41, Year 2,53 , Year 3,56 and Year 4, 1175 . Can you please explain how to calculate
At time 0 the outflow is 1,025
At time 1 they need an extra 4%. 4% x 1,025 = 41.
They now have working capital of 1,025 + 41 = 1,066At time 2 they need another 5%. 5% x 1,066 = 53
They now have working capital of 1,066 + 53 = 1,119At time 3 they need another 5%. 5% x 1,119 = 56
At time 4, all the working capital is released as usual, so an inflow of 1,175
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