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I am looking at two questions regarding investment appraisal – CJ Co Paper 12/10 and SC Co 06/08. (Q42 & 47 in BPP P&R Kit)
I am unsure as to why in CJ Co, the working capital is not recorded as cash inflow at the end of year 4? However, in SC Co the working capital is recorded as a cash inflow in year 4.Could you clarify how one is to determine when to treat it as in inflow at the end of the period and when not to?
Thanks in advance!
We assume that the working capital is recovered unless the question says others.
In CJ, the question says “….ignoring any scrap value or working capital recovery…” (towards the end of the question).
Hello sir
could you please explain what liquidity means?
And in which circumstamces is liquidity considered a more important objective to working capital mgt. than profitability and vice versa?
Do appreciate ur helpYou must start a new thread when it is a new topic – although this does relate to working capital, it has nothing to do with the way we deal with working capital when calculating NPV’s!
Liquidity is having enough cash to be able to keep operating (to be able to pay expenses etc..)
Both liquidity and profitability are important, but a company can run out of cash even if they are profitable (because, for example, receivables are taking a long time to pay), and in that case the company could end up having to close down.
I explain this (and give examples) in the free lectures on working capital management in relation in particular to over-trading.
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