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When working capital is used in Qu 1 it usually is recovered in full in the last year unless the qu specifically states to ‘ignore working capital recovery’.
Dec 10 – Specifically states to ignore working capital recovery
Jun 11 & Dec 11 – Have working capital in the qu and it doesnt say to do anything with the working capital therefore it is automatically recovered in the final year
Jun 13 – Is the exact same as Jun 11 & Dec 11 but yet the examiner does not add back the working capital whereas if you were basing it on Jun & Dec 11 it should have been added back.
Can someone please help me as the difference in adding this back or not is the difference in whether it is a poisitive NPV or not.
Thanks
CiaraNo – it is nothing to do with the NPV.
The reason is that the project is not stopping at the end of the four years. The question says in the first paragraph that the machine will need replacing – that suggests that things will continue after the four years and that therefore the working capital will still be needed.
However, if you had recovered the working capital, you would not have lost any marks (even though the NPV would have been different). I would have recovered it 🙂
That makes perfect sense. So in the exam if you’re not sure if the project is finishing or not just recover the working capital to be sure?
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