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In the kaplan answers, they do not include the working capital outflow in the first year of operation but they include its inflow in the last year. I don’t understand how. I’m getting a different NPV as a result (my other year flows are correct). Also they ask for the sensitivity analysis of sales price which I did not understand how to do because there were lagging taxes. Could you please explain?
I do not have the Kaplan Kit but I assume that they have copied the examiners answer to the question and that I do have.
The working capital outflow is at time 0 and is included in the answer.
If you look below the calculation of the PV.s of the inflows you will see that the answer then subtracts the initial investment and the initial working capital to arrive at the NPV (because the PV of the initial investment and working capital obviously does not need discounting).The sensitivity of any flow is the NPV as a percentage of the PV of the flows that are changing (as I explain in my free lectures).
For every $1 change in the selling price, the profit will change by $1 and therefore the tax will change by $1 x 30% = $0.30
Therefore the PV for the flows that change is the PV of the revenue flows (which are $16,000 per year from time 1 to 5) less the PV of the tax on the revenue flows (which are 30% x $16,000 from time 2 to 6 because of the 1 year delay in tax).
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