Hi Sir,
Hope you all are safe.
Sir i have one doubt regarding the working capital inflation while doing the investment appraisal Npv 20M questions...
In one method, the working capital is inflated (assume if the life - 4 yrs) upto 3 years and the difference will be taken and in 4th year no inflation and the 3rd year inflation will be taken as +ve for 4th year
In other method, the working capital keeps on inflating untill the last year
So how to know that which method to use if the question doesn’t says anything other than
‘Working capital investment is X and it is expected to inflate @ general inflation X’
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Working capital inflation - NPV Questions
5y ago#1As I explain in my free lectures, assume all the working capital is recovered in the final year unless the question specifically says otherwise or the question makes it clear that the project will be continuing after the fourth year.
Ok sir thanks for earlier reply,
As per your , we should assume that the WC will be fully recovered in the last year unless mentioned in question.
Sir one question is this:
“Working capital investment of $150,000 will already exist at the start of 4-year period, due to the operation of the existing machine. This investment in WC is expected to increase in nominal terms in line with the gen rate of inflation”
In this question i had doubt of recoverd or not i think its recovered...pls advise me if my question understanding is wrong...
I think in the second line mentions it...for conformation...!!
5y ago#3Is this from a past exam question (because it is very strange wording).
Without seeing the rest of the question I would assume no working capital to be required at time 0, but then working capital to be recovered at time 4.
Yea sir, it is the question from december 2015
the question is ARGNIL CO.
5y ago#6Yes, I remember it now and it was strange.
However it is as I have written in my previous replies. The only working capital required at time 0 is the inflation because the 150,000 already exists, and there is no recovery at the end because the question makes it clear that production will continue.
Thanks..!
5y ago#8You are welcome :-)
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