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Hello sir,
Please clarify regarding below question:
AW Co needs to have $100,000 working capital in place immediately for the start of a 2-year project. The amount will stay constant in real terms. Inflation is running at 10% per annum, and AW Co’s money cost of capital is 12%. What is the present value of the cash flows relating to working capital?
A. $(21,060) B. $(20,300) C. $(108,730) D. $(4,090)My question is how do we know that the Working capital in question will be need yearly?
It only mentioned need to have $100,000 working capital.Thanks
Avinash.Working capital is always needed throughout the life of the project in order to finance the inventory etc..
Had there not been inflation we would simply have needed the initial 100,000 (which would then have been released at the end of the project). Because of the inflation we need to ‘top up’ the amount needed each year.
I do explain this in my lectures on investment appraisal with working capital.
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