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(1) Kindly advice why the inflation rate for years 2 ,3 and 4 was not apply as 1.08 times the revenue given in the question for the years 2, 3 and 4. Similiarlly for the direct cost. I assumed that the amounts stated was not at current price but is for the said year and I used 1.08 times the given revenue for years 2, 3 and 4 but the answer used it as 1.08 to the power of 2 for year 2 and so on.
(2) why the working capital start from year 0 and not start from year 1. since sales were from year 1. kindly advice.
1. Why did you assume that the flows were not at current prices? If they are reviewing a project and have ignored inflation (as they have at the moment) then they will take the costs/prices that exist at the moment. By next year (when the project will have started) the flows will have inflated.
2. There is no such thing as year 0. It is time 0 – now – a point in time.
The first year starts now (time 0) and ends in a years time (time 1). Working capital is required at the beginning of each year (per the question) and is therefore first needed at time 0. (We always assume that operating flows are at the ends of year, so the first years revenue and costs occur at time 1)Sir, kindly advice me for remaining working capital release back? Why is it 7.38?
Thanks
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