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Hi
Hope you well
I don’t understand why they have put 7.38 in the WORKING Capital calculation in year 4.
20% x 36.92 year 4 sales = 7.38 and if you subtract the working capital from yr 0 to yr 2 there’s excess which is 4.98. I understand this will be the excess wc in year 3 but I don’t understand why it will 7.98 in year 4.
Please explain.
As per note (vi) of the question (and as we always assume anyway), all the working capital is released at the end of the project.
The total working capital flows for the first 3 years is 4.97 + 3.57 + 3.82 – 4.98 = 7.38.
This is no longer needed when the project finishes and is therefore an inflow at time 4.Hi John
Thank you for your reply.
I don’t understand why it will be released as an inflow. If it’s already used up in yr 0 to yr 3
How does it automatically become an inflow in year 4 ?
But it hasn’t been used up 🙂
Working capital is the money needed to finance (for example) the purchase of inventory. At the end of the project the inventory is no longer needed and the working capital is released.
If you are still unsure then do watch my free Paper FM lecture on investment appraisal with working capital, because this is revision from Paper FM (was F9).
Thank you so much !!!
Makes sense. The working capital is released at the end of the project because you’ll end up selling your stock etc and at the end of project you’ll get the inflow.
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