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Dear Tutor,
I was looking through the calculation of working capital in APV and FCF valuation questions.
Example of APV: Dec 2018, Q3:
“Working capital of $6m, not included in the estimates above and funded from R/E, will also be required immediately for the project, rising by the predicted inflation rate for each year. Any remaining W/C will released in full at the end of the project.”The working capital for year 1 is: 6m*(1+0.08) = 6.48m, thus, the W/C expense is 0.48m for year 1.
Example of FCF valuation: BBP revision kit, Q61:
“The company will require an additional investment in assets of 30c per $1 increase in sales revenue for the next four years.”The working capital for year 2 is calculated via: (Y2 rev – Y1 rev)*0.3.
My question is, what keyword(s) should I look out for to determine the W/C charge per year? From the example of APV, the working capital of Y1 is the incremental increase from the W/C charge in Y0, therefore only the additional requirement is recorded within the appraisal. Whereas from the FCF valuation example, the W/C is recorded as the full amount.
Thanks in advance.
ILBut they are both incremental!!
In the second example the extra working capital is a proportion of the incremental sales revenue (so the total working capital stays at a proportion of the total sales).
They are both standard exam wordings with regard to working capital, and all you can really do is keep practicing questions and get used to the wordings.
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