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Working Capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Working Capital

  • This topic has 5 replies, 2 voices, and was last updated 1 year ago by LMR1006.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • March 3, 2024 at 10:53 am #701833
    learnsignal123
    Participant
    • Topics: 16
    • Replies: 26
    • ☆

    In questions when they say . ” initial investment in working capital of 200,000 will be needed with 2% inflation per year ”

    We deduct the WC amount every year after taxable profit

    But in some questions we add the whole of initial investemnt in the ending year of the investment
    for ex – 200,000 will be added onto the 4th year if the project is said to have an estimated life of 4 years

    However , in some questions both are done meaning the inflated value ( inflated value after doing the whole wc calculations will be deducted) and the whole of initial investment in wc is added onto the ending year of project

    So my question is

    When are we supposed to add back the initial investment to the ending year ?
    If the question says what , should we add it back ?
    What would the question say that indicates that the initial investment of 200,000 should be added back ?

    March 3, 2024 at 11:28 am #701834
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    The treatment of working capital in NPV calculations can vary depending on the specific question or scenario.

    In general, any money invested in working capital at the start of the project is considered as an outflow and is deducted from the initial investment. If there are additional working capital requirements throughout the project’s life, these are treated as cash outflows in the respective years.
    However, at the end of the project, any working capital that was invested at the start is typically recovered and treated as a cash inflow.
    At t0 / t1-3 / t4
    (100) / 0 / 100

    At t0 / t1-3 / t4
    (100) / (20) Pa/ 160

    At t0 / t1-3 //////////t4
    (100) / (10) (10) 10 / 110. Required extra for 2 years and a little less

    At t0 / t1-3 /////////////t4
    (100) / 10, 10, (10)/ 90 Required less for 2 years and a little more

    March 3, 2024 at 11:47 am #701835
    learnsignal123
    Participant
    • Topics: 16
    • Replies: 26
    • ☆

    At t0 / t1-3 //////////t4
    (100) / (10) (10) 10 / 110. Required extra for 2 years and a little less

    At t0 / t1-3 /////////////t4
    (100) / 10, 10, (10)/ 90 Required less for 2 years and a little more

    For both of these , can you explain why you are adding and deduting the values ?
    Ik that we’re supposed to deduct it , but i dont understand why your’e adding them

    thank uu

    March 3, 2024 at 12:26 pm #701846
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    If working capital goes up or down due to a requirement or inflation or connected to sales
    An increase in requirement is shown as a further investment (x) and a drop in wc required due to a change in sales would be a positive x

    March 3, 2024 at 12:35 pm #701847
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    So say we need 50 now,but wc increase by 5 Pa for the first two years and then fall by 10 the next two years

    T0 ((50))
    T1 (5)
    T2 (5)
    T3 10
    T4 10
    T5 40

    March 3, 2024 at 12:42 pm #701848
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1511
    • ☆☆☆☆☆

    Or let us say
    Revenue equals

    Rev t1 = 1000
    Rev t2= 1200
    Rev t3= 1100

    Let’s say WC is 10% of the sales revenue

    T0 = (100) because they need 10% of 1000 = 100
    T1= (20) because they need 10% of 1200 = 120…..so they only need an increase of 20
    T2 = 10 because they need 10% of 1100 = 110 ….. so they only need an decrease of 10
    T3 110….. clear out the investment in wc if the project ends

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