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Hi ,
Is it possible to solve the following question No.133 in the BPP practice kit using the Real Cost of capital?
The question:
(AW Co. needs to have $100,000 working capital in place immediately for the start of a 2-year project. The amount will stay constant in real terms. Inflation is running at 10% per annum, and AW Co’s money cost of capital 12%.What is the Present Value of the cash flows relating to working capital ?)
I have tried to solve it using the Real rate (1.818%) and got -$3,540 as an answer, however the practice kit solution is -$21,260, using the normal method for inflation.
appreciate your help
Jasim AlmahalI am away from home until tomorrow night and I do not have the Revision Kit with me.
However, from what you have written, although you could use the real cost of capital on some (and only some) of the flows, it would be messy and more time-consuming.
At time 0 there is an outflow of 100,000. At time 1 an outflow of 10,000 (to keep the working capital at 100,000 in real terms). And then, of course there will be an inflow of 110,000 at time 2.
Thanks Mr. Moffat,
Could u please show the solution using the real rate for this question.
Regards
No, because it would be wasting your time and my time 🙂
There are only 2 flows to discount so it really couldn’t be any easier discounting in the normal way using the tables at 12%.
I have no idea how you got your answer, the flows are:
0 (100,000)
1. (10,000)
2 110,000If you have copied the original question correctly then it would seem that the answer in the BPP Revision Kit is wrong also. I will check when I get back from vacation late tonight.
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