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Sir in case of Working capital we always use incremental element. So why in case of Sleepon hotels, for maintenance costs, after the first year we don’t show $4million only as our maintenance expenditure? after all it is only $ 4m which is incremental.
I find it strnage why examiner is showing $19m, $23m and $27m for yrs 3, 4 and 5 respectively? I fell it should be $4m, $4m, $4m for yrs 3, 4 and 5 respectively.
You cannot compare the two.
Maintenance costs are payable each year and the amount each year is $15, with the amount payable increasing each year. Why on earth should maintenance costs fall and just pay an incremental amount – it would make no sense.
Working capital is not an expense, but extra cash flows are needed to maintain the level of working capital due to inflation is receivables, inventories etc..
The following statement was again similar(a part of my Kaplan Study text TYU), and they adjust for it by taking $15m, each year for NCAs and $2m for WC, when i had thought that since there is no element of increment, we will put 0 in all the years, as far as investment in WC and NCAs is concerned.
“Butler Co invested $15m in non-current assets and $2m in working capital last year. These annual amounts are expected to stay constant in future.”
so am getting a little confused in this aspect, which you would have guessed from my previous doubt too. Where should we be taking only incremental amounts(WC i know for sure is concerned with increments only) sir??
Working capital is the money needed to finance receivables etc.. If sales increase then receivables will increase and so they need more working capital But they only need the extra / incremental so as to being the working capital up to the new level needed.
so are you suggesting that apart from WC, be it non-current assets or any other expenditure, we take full amount of money spent last year, and include in it any increment or deterioration occurring this year? And not solely the increment/decrement which is exclusively the case for WC.
Can you please corroborate sir! it seems really important and fundamental, but am somehow still floundering to understand.
For everything we need the extra cash spent each year.
Working capital is the amount needed to finance the receivables, inventory etc. that is being held by the company. If, for example, they need to hold inventory of $100 at the start then there is an outflow of $100 at the start. If next year they decide they need to hold $110 inventory (because sales have increased) then given that they already have $100 they just need to spend an extra $10 to bring it up to the level needed.
Hello Sir,
I am struggling to understand why the timing of cash flow ( cash receipts and expenses) have been shown in year 2 when it has been mentioned “the park could be constructed and working in one year’s time” ? But in the same time, working capital has been included in Year 1 cash flow when the question says ” Working capital of 50m will be required from the end of year one”?Thank you
The first capital payment is immediate and is at time 0 (which is the start of the first year).
The working capital is needed at the end of the first year, which is in 1 years time and is therefore at time 1.
The park will be working in one years time and so the first operating flows will occur in the second year. As always (unless specifically told otherwise) we assume that operating flows occur at the ends of year, so the first operating flows occur at time 2 (the end of the second year).
Time 0, 1, 2 etc are not years. They are points in time that are 1 year apart.
Time 0 is the start of the first year.
Time 1 is the end of the first year / start of the second year
Time 2 is the end of the second year/start of the third year
and so on 🙂
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