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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 yearsHowever , 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 ?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 / 100At t0 / t1-3 / t4
(100) / (20) Pa/ 160At t0 / t1-3 //////////t4
(100) / (10) (10) 10 / 110. Required extra for 2 years and a little lessAt t0 / t1-3 /////////////t4
(100) / 10, 10, (10)/ 90 Required less for 2 years and a little moreAt t0 / t1-3 //////////t4
(100) / (10) (10) 10 / 110. Required extra for 2 years and a little lessAt t0 / t1-3 /////////////t4
(100) / 10, 10, (10)/ 90 Required less for 2 years and a little moreFor 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 themthank uu
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 xSo 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 40Or let us say
Revenue equalsRev t1 = 1000
Rev t2= 1200
Rev t3= 1100Let’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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