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September / December 2015
For question 5, for part (a)
Why isnt the working capital investment in Year 0 of $150 000 not included within the cashflow table? In the answer key, the working capital investment only start from year 1.
In year 0 there would be a working capital investment of (150 000) right ?
For this same question. We can also do it in different way from the answer key by finding the contribution per unit and then inflating it by the general infation rate and then calculating the total contribution right ?
The question says that the $150,000 is already there.
Yes – because the selling price and variable costs both inflate at the same rate, you can calculate the contribution and inflate that.
Okay, got it.But in the cash flow table, for Year 5, by right there is supposed to be a working capital investment of $180 right ? But why isn’t there a working capital investment of $180 in Year 5 in the answer key?
I think you mean working capital recovery (not investment!).
The reason it has not been recovered is that the machine is being replaced and therefore the working capital will still be needed.
Yes. Okay I get it now. So in other words, if its stated in the question
– That the machine will need to be replaced – Cannot recover Working Capital at end of project life because it will still be needed.
– That the machine will be sold – Can recover Working Capital at end of project life because it will no longer be needed .
Am I right ?
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