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Hello John,
Just had a confusion about the treatment of working capital in different scenarios. When do we calculate incremental Work cap and when do we include the total requirement of If the work cap in the calculation? In March 23 Q2, incremental WC is calculated whereas in MJ19 Q1, total WC required is used directly in the calculations. Is there something I’m missing out in the scenarios?Working capital once paid for as an outflow does not disappear. It stays there and changes are only needed if we are told that the total requirement changes. In that case (such as where the level of working capital is given as a % of the next years revenue) then we only need to deal with the change required i.e. the incremental amount.
If, on the other hand, the question states that a specific amount of additional working capital is needed then this additional amount has to be dealt with.In the MJ2019 question, the answer is showing the incremental working capital required (a change in each year equal to 10% of the change in the revenue).
Ok, got it now. You made it very clear. Thanks
In the same question of MJ2019, why the profit on the machinery isn’t taxed, when machinery is sold at a profit at the end?
35m
Tax dep @ 15% 5.25m for 4 yrs
at year 4 it is sold for 7m.
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