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When calculating working capital requirements for an investment, eg (250) at the initial investment (year 0) this then increases every year. However in some past exam papers, i have seen that the working capital is then released at the end of the project, ie a positive number, and in some cases it is just ignored.
What is the explanation behind is? When do you know when to add the positive at the final year or not?
Working capital is only use to support the investment on day to day operation. and the balance is incremented (topped up) every year if there is an inflation involved. The working capital is not needed when the project finishes that’s why it is in Positive then.
In other case it is called “Additional Investment”
Look for question carefully for this trick..If the project ends add working capital back. If it doesn’t end e.g cash flows will continue in perpetuity then don’t add it back.
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Sometimes it is ignored at the end because it explicitly says in the question that you do not get to use the cash flow of the release of working capital in your calculations.
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