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Working capital NPV

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Working capital NPV

  • This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • September 7, 2016 at 3:12 pm #338614
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • β˜†β˜†β˜†

    Hi tutor,

    I have a question on working capital inflation when calculating NPV.

    1)
    Qn: project will last for 4 years. An initial investment in working capital is required and working capital will follow the general rate of inflation. Working capital recovery is to be ignored.

    Working capital increment should stop at year 4, rather than at year 3, right?

    If working capital recovery is to be considered, then working capital increment should stop at year3, and the recovery will be in year 4. The recovery amount will be the year 3 inflated working capital amount. Is this correct?

    Also, when evaluating leasing versus buying, all financing costs are tax deductible, right?

    Hope to hear from you, thanks πŸ™‚

    September 7, 2016 at 5:52 pm #338693
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • β˜†β˜†β˜†β˜†β˜†

    With regard to working capital, if working capital recovery is to be ignored, then yes – the increment will stop at time 4.

    With lease versus buy – yes, all costs are tax allowable (but interest is never included in the cash flows, because (as always) it is dealt with in the discounting)

    September 8, 2016 at 2:17 am #338869
    complicated
    Member
    • Topics: 110
    • Replies: 210
    • β˜†β˜†β˜†

    OK, thank you! πŸ™‚

    September 8, 2016 at 7:08 am #338908
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • β˜†β˜†β˜†β˜†β˜†

    You are welcome πŸ™‚

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