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HDW co; ( june 13)
In addition to the initial cost of the new machinery, initial investment in working capital of $500,000 will be required.
Investment in working capital will be subject to the general rate of inflation, which is expected to be 4·7% per year.Kindly explain, its working capital treatment?
At time 0 there is an outflow of 500 for working capital.
Working capital is inflating at 4.7% per year and therefore the working capital needed at time 1 is 500 x 1.047 = 523.5. However they already have 500 and so the outflow is the extra 23.5 (rounded to 24 in the answer).
At time 2 they need working capital to be 523.5 x 1.047 = 548.1. However the already have 523.5 and do the outflow is the extra 548.1 – 523.5 = 24.6 (rounded to 25 in the answer).
And so on…
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